US CHINA TRADE WAR–TRUMP, APPOINTMENTS, TRADE POLICY, TAA FOR COMPANIES, CHINA NME AT WTO, SOLAR CELLS, HARDWOOD PLYWOOD, CYBERHACKING, TRADE CASES IN CHINA, CANADA AND MEXICO

US Capital Pennsylvania Avenue After the Snow Washington DCTRADE IS A TWO WAY STREET

“PROTECTIONISM BECOMES DESTRUCTIONISM; IT COSTS JOBS”

PRESIDENT RONALD REAGAN, JUNE 28, 1986

US CHINA TRADE WAR DECEMBER 19, 2016

Dear Friends,

This newsletter contains several articles about trade and Trump after his victory on November 8th.  As mentioned in my last blog post, the Trump victory will have a significant impact on trade policy.  The TPP is dead.

But the next question is how will Trump help revive manufacturing in the United States and help the Rust Belt states, Wisconsin, Michigan, Pennsylvania and Ohio, which put him in the White House?

Will there be a trade war with China and other countries?  Trump’s tough talk on the One China policy indicates a trade war, but his appointments to the US Ambassador to China and to the Commerce Department Secretary indicate the contrary.  Trump, however, may be trying to use uncertainty to create leverage and a deal with the Chinese government on trade and other issues.

Will Trump use taxes to give US manufacturing an advantage at the detriment of imports?

Trump will try and do everything possible to increase jobs in the United States.  Hopefully, that will mean more support to Trade Adjustment Assistance for Companies, which is the only effective US trade remedy that saves companies and the jobs that go with them without damaging US downstream production.

In addition, this blog post describes the recent WTO complaint China filed against the United States and the EC for failing to give it market economy status under the US and EC antidumping and countervailing duty laws.  The newsletter also gives the upcoming deadlines under the Solar Cells and Hardwood Plywood cases against China.

Under the Universal Trade War theme, under China is an article on ways in which the Chinese government can retaliate against US companies in the trade war and newsletters from a Chinese law firm.  In addition, under Canada attached is an article from Dan Kiselbach, a Canadian trade lawyer, about whether the Trump Administration can truly get out of NAFTA and also information about the recent Softwood Lumber Case against Canada.  Finally, from Mexico there is information about a recent Carbon Steel Pipe and Tube case filed against imports from Korea, India, Spain and Ukraine, along with a brief description of Mexican antidumping law.

Finally, there is an announcement from the Justice Department about the accomplishments in the recent US/China meetings on Computer Hacking and also recent 337 intellectual property cases against China.

If anyone has any questions or wants additional information, please feel free to contact me at my e-mail address bill@harrisbricken.com.

Best regards,

Bill Perry

TRADE AND TRADE POLICY

TRUMP AND TRADE – A BULL IN A CHINA SHOP OR A SAVVY NEGOTIGATOR?

On December 2, 2016, President-elect Donald Trump took a phone call from President Ing Wen Tsai of Taiwan.  Trump’s decision to take the phone call from the Taiwan President created a fire storm as commentators questioned whether the United States would stick to the “one China” policy that implies that Taiwan is a part of China and that the long term relationship between China and the US would change.

In response, many commentators wrote articles suggesting that Trump was a “Bull in a China shop”, a clumsy inexperienced person taking actions without thinking about consequences.  Chinese media called Trump “an ignorant child.”

It has since come out that the specific phone call with President Tsai had been discussed for several months and set up by former Republican Congressional leader Bob Dole.  In fact, in addition to taking the call from President Tsai, President-elect, Trump met with Henry Kissinger, who is serving as a liaison for the Chinese government.

Instead of a Bull in China Shop, what President-Elect Donald Trump may have been trying to do with China is create a perception of strength and set up a sense of uncertainty.  What is Trump going to do?

President Ronald Reagan was a master at playing a similar game.  Projecting strength and also a feeling of uncertainty.  What is Reagan going to do?  Reagan’s projection of strength and uncertainty created agreements with Russia that led to the collapse of the Soviet Union.

A projection of strength and a sense of uncertainty gives Trump something Reagan had—leverage, which makes it easier to negotiate better deals.

On December 11. 2016, Trump stated on Fox News:

“I fully understand the ‘one China’ policy, but I don’t know why we have to be bound by a One China policy unless we make a deal with China having to do with other things, including trade.”

Companies and countries should not make the mistake that many in the mainstream US media have made.  Do not underestimate Donald Trump.  He is not an ignorant child and many of his advisors are very knowledgeable about China.  Trump wants a deal with China and he will not give something for nothing.

TRUMP’S APPOINTMENTS DO NOT INDICATE A TRADE WAR WITH CHINA

BRANSTAD TO BE AMBASSADOR TO CHINA

Through his appointments, Trump is indicating that he realizes how important the relationship is with China and he intends to appoint experts that understand China.  On December 7th at a “Thank You” rally in Iowa, President-elect Trump announced that six term Iowa Governor Terry Branstad will be his pick for Ambassador to China.  Governor Branstad has personally known Chinese President Xi Jinping since 1985 when Branstad was governor of Iowa and Xi was an agricultural official in northern China. For two weeks, Xi stayed with a family in the town of Muscatine, Iowa, an experience he likes to recall when visiting the State.  Subsequently he met with Gov. Branstad in 2012 as vice chairman of the Chinese government.

Chinese foreign ministry spokesman Lu Kang welcomed Branstad as an “old friend of the Chinese people” playing “a bigger role in China–U.S. relations”.

Branstad is also a friend of Trump, working actively on Trump’s campaign.  During the general election, his son, Eric Branstad, managed Trump’s campaign in the state. Trump then won in Iowa, 51% of the vote to 42% for Clinton.

This appointment may be a signal that President-elect Trump does not want a trade war with China because Iowa has $2.3 billion in exports to China mostly agricultural exports, including corn and soybeans.  Trump’s selection of Branstad for the most important diplomatic position to China suggests that the president-elect wants to keep negotiating channels open with Beijing, rather than adopt a knee jerk confrontational attitude

On December 8, 2016, at a speech in Iowa, which can be found at https://www.youtube.com/watch?v=-rPh9YG3AmY, Trump stated:

“One of the most important relationships we must improve and we have to improve is our relationship with China.  The nation of China is responsible for almost of half of America’s trade deficit.

China is not a market economy they got a lot of help and that is why we designate them as being them as a nonmarket economy.  Big thing.”

Trump went on to state, that the Chinese government has not “played by the rules, and they know it’s time that they’re going to start.” Trump went on to cite that China was responsible for “massive theft of intellectual property,” “putting unfair taxes on our companies,” “massive devaluation of their currency” and “product dumping”.

Trump further stated that the Ambassador he was going to appoint to China has “lots of friends there”.  According to Trump, Branstad requested that Trump not speak ill of China because in Iowa “we do well with China”.

Trump also stated that he is looking to work on the relationship between China and the US and that Governor Branstad “knows China and likes China” and “knows how to deliver results.”  Trump went on to state that Governor Branstad is highly respected by Chinese officials and a great friend of mine.

Donald Trump finished by stating “We’re going to have mutual respect, and China is going to benefit and we’re going to benefit. And Terry is going to lead the way.”

As the phone call with President Tsai of Taiwan indicates and his statement to Fox News, Trump is no push over.  There is a new strong President in town so do not try and bully him.  This President has options.

On the other hand, during the Primary and even after the election, well-respected conservative newspapers and commentators have stated that President Trump has to be careful not to create a trade war, especially with China.  As recently as November 30, 2016, in Investors Business Daily, the one newspaper that projected a Trump victory prior to the election, two commentators, Congressman David Mcintosh and Scott Linicome in an article entitled “Trump Should Tread Softly On His New Trade Agenda” stated:

“exploiting ambiguities in the current web of U.S. trade laws to enact the President’s trade priorities by executive fiat could engender opposition from Congress, the U.S. business community and U.S. trading partners, thus leading to court challenges similar to those fled by the Republican Congress against President Obama’s executive actions on immigration.

The crucial difference, however, is that the months of uncertainty surrounding the trade challenges would imperil trillions of dollars’ worth of goods and services, especially if the courts refused to enjoin the executive branch from acting while any such litigation is pending.”

WILBUR ROSS—NEXT COMMERCE DEPARTMENT SECRETARY

In addition, as explained in more detail below, Trump has decided to appoint billionaire private equity investor Wilbur Ross, a Warren Buffet type, to be the next Commerce Department Secretary.  Trump’s decision to appoint Ross, a brilliant investor, industry expert and deal maker, indicates a decision to put trade/business professionals at the highest level in his Administration, who are very experienced with regard to business, international competition and China.

Ross was one of the important creators of Trump’s economic plan, which the campaign claimed will increase federal revenues by $1.7 trillion.  With regards to Tariffs, Ross has specifically stated:

“Tariffs will be used not as an end game but rather as a negotiating tool to encourage our trading partners to cease cheating.  If, however, the cheating does not stop, Trump will impose appropriate defensive tariffs to level the playing field.”

In this video interview with the Epoch Times, Wilbur Ross himself shows a great knowledge of the US relationship with China, http://www.theepochtimes.com/n3/1751796-billionaire-investor-wilbur-ross-china-still-lags-us-in-innovation/.  In the video, Ross acknowledges that although China has made progress, the US is the most innovative country in the World.  Ross also states that in 2003 when he spoke out against China he was acquiring the majority interest in Bethlehem Steel and he was against Chinese companies’ product dumping:

“namely selling products for less in a foreign market than their true price in your domestic market.

That’s the kind of activity that we think should be protected against. We are generally free market people but what was happening back in the early 2000s with steel and what is starting to happen again, is that product was actually being sold in this country for less than the total cost of manufacturing it.

That’s not legitimate competition. If someone can make things more inexpensively in their country and sell it here that’s fine with me. But it shouldn’t be that they have one price in their country and a lower price outside.”

In the video Ross further states that the reason China was dumping is:

“they had a period of overcapacity and because China is so much about jobs as opposed to profits, it was very important for the government to maintain jobs. So to maintain jobs they had to maintain production, even though there was not enough demand for it. The way they tried to solve the problem was by dumping it outside.”

Ross is correct that with its large overcapacity, most Chinese steel companies were dumping and probably at very high rates.  But as indicated below, since the Commerce Department continues to treat China as a nonmarket economy and refuses to look at actual costs and prices in China, no one knows for certain which Chinese companies are truly dumping and what the real dumping rate of the Chinese companies is.

With regard to Chinese innovation, Ross indicates that he is very knowledgeable about China stating:

“China is coming along in terms of innovation. They now have the world’s biggest and fastest computer. That would have been unimaginable a decade ago. They’ve launched spaceships into outer space. They have not yet gotten to be as innovative as the United States is, nobody has been as innovative. Year after year the United States gets more patents than any other country by a wide margin. Interestingly, it’s Japan that comes in second.”

As to why China lags the US in innovation, Ross states:

“The United States is basically a free market economy and their entrepreneurship has been highly prized here for centuries and centuries so there’s a real tradition of risk-taking. Innovation involves a lot of risk-taking.

A state-owned enterprise is much less likely to be a big risk-taker then private capital. Since China had been so dominated by the state-owned enterprises it’s hard in a big bureaucratic system to be innovative. Look at the U.S. government itself, what interesting innovations have they come up with?”

Being a Warren Buffet type and very involved in the US Stock market, Wilbur Ross also has very educated views about the problems with the China Stock Market:

We think that China has two separate problems right now. One is the market itself, the equity market, and that got completely out of control. . . .

I think what then happened, the government seemed to have panicked and made lots and lots of very panicky moves. They first raised the margin requirement then they lowered it. They threw hundreds of billions of dollars into the market. Now they’re prosecuting people who spread negative stories about the market.

I think the difficulty with all that is, when a government shows signs of panic, particularly a government that historically has been able to control what happens pretty well, when that government shows panic it makes people more frightened, not less frightened.

Like many China experts, Ross believes that China’s growth numbers are not accurate:

The Chinese economy clearly is not growing at anything like 7 percent. We have felt for a couple of years that those figures were very, very generous. If you look at physical indicators—electricity consumption, natural gas consumption, oil consumption, cement consumption, steel consumption, telecom consumption, retails sales—if you look at all those indicators, none of them were growing at a rate that was equal to 7 percent and neither were the exports.

With regard to economic reform in China, Ross states:

I think what they’re trying to do is several things all at once and that makes it very challenging.

They’re trying to become more of a consumer-driven economy, but the reality is that their largest driver is capital investment. It’s hard to make that transition because capital investment is still about 44 percent of the economy.

They’re trying to make the transition, but meanwhile they’re doing the very- much-needed anti-corruption drive and that in a strange way has hurt consumer spending.  . . .

I think they’ll get there, just that the transition is a hard one. Meanwhile there is super-imposed upon it, the economic issues in the rest of the world. Combined with China’s rising labor costs and the very strong currency, make it very difficult to be an exporter.

These responses along with the video indicate that Ross is not a knee-jerk protectionist and has a deep knowledge of China, which does not indicate a trade war any time soon.

COULD TAXES BE THE WAY TRUMP MAKES US INDUSTRY GREAT AGAIN

On the other hand, Trump and Republicans in Congress may be creating an alternative to tariffs to spur US manufacturing and that is taxes.  In the Congress, one proposal in the House Republicans’ tax-reform plan is to give American-made products a big tax advantage over their foreign competitors.  Although some commentators have pointed to a potential trade war, Ways and Means Chairman Kevin Brady stated, “We are now in the process of designing all aspects of our ‘Build for Growth’ tax plan to withstand any WTO challenge. We’re confident we can win any case.”

The key issue is a plan to fundamentally remake the tax system by taxing US companies based on where they sell their goods, not where the business happens to be located. As part of that, Republican tax legislators want to include what experts call “border adjustments” — new taxes on imports as well as tax rebates on exports.  This plan would replace the current corporate tax code with something known among experts as a “border-adjustable, destination-based” tax system.  Under their proposal, imports would be charged the same 20 percent tax that domestic companies would face. Exports would be excused from taxes.  It would amount to a fundamental change, with the government taxing companies based on where they sell their wares, rather than where the business is located.

According to tax experts, this new tax plan would offset inversions and other types of international tax avoidance because companies would have less incentive to go to other countries looking for tax savings. The proposal would also finance a huge chunk of the Republicans’ overall tax plan — the Tax Policy Center estimates border adjustments would raise $1.2 trillion, making it the third-largest pay-for in the plan.

The proposal is already controversial because it threatens big tax increases to many large retailers, such as Walmart and Home Depot and other companies, which heavily rely on imports.

But critics say it would also violate free-trade agreements by favoring American-made goods over imports. That’s because, while they would all be subject to the same 20 percent tax, U.S. companies would be able to deduct the cost of workers’ pay when calculating their tax bills. Imports would not be given the same treatment and the difference could be dramatic.

If a U.S. company sold a product for $100 and it spent $70 on its workers’ pay, under the Republican plan the remaining $30 would be subject to the 20% tax. That would produce a $6 tax bill. An imported version of the same product would be forced to pay the 20% tax on the entire $100 sale, producing a $20 tax bill.

On December 7, 2016, Koch Industries came out against the Border Adjustment provision of the new tax overhaul with Philip Ellender, the head of government affairs at Koch Companies Public Sector LLC, stating that the so-called border adjustment proposal currently being considered by Republican lawmakers:

“would adversely impact American consumers by forcing them to pay higher prices on products produced in and goods imported to the U.S. that they use every single day.  While companies like Koch who manufacture and produce many products domestically would greatly benefit in the short-term, the long term consequences to the economy and the American consumer could be devastating.”

Another problem is the World Trade Organization (“WTO”) allows border adjustments for so-called indirect taxes on transactions, such as value-added taxes, but not on direct taxes, such as income taxes. The Republican plan is a hybrid, raising questions about how the WTO would categorize it.

Any change in US tax treatment could be challenged by other countries in the WTO as a violation of the WTO Agreement of most favored nation, which requires imports to be treated the same as domestically produced products.  If a WTO tribunal were to rule against the United States, the prevailing countries could be allowed to retaliate against US exports to account for the injury to their exports, which could be as high at $1.2 trillion.

But any challenge in the WTO will take years to litigate.  A good example of this is the Byrd Amendment.  The Byrd Amendment allowed US petitioner companies to get the dumping and countervailing duties collected by Customs.  The Byrd Amendment passed in 2000 and after WTO litigation resulting in possible retaliation by other countries against the United States, the Congress repealed the Byrd Amendment in December 2005 on 51 to 50 vote in the Senate with Vice President Cheney breaking the tie.  But for five years US petitioners collected the duties.

So instead of a direct protectionism using tariffs, any protectionism may be indirect, but it will have the same effect.  Give US companies a major incentive to produce their products in the US, rather than rely on imports.

But the real problem with the tax plan is international trade/globalization victimhood which will lead the companies not to make the changes they need to make to be competitive.  Just like the steel industry, US companies would continue to hunker down behind protectionist walls and never modernize their production to meet competition.  That is the problem.  As President Reagan himself observed, protectionism makes companies weaker not stronger and in the end does not save the companies and industries that are being protected.

On December 13th in a letter to Congress more than 50 retail and manufacturing associations urged Congress to abandon border tax adjustments saying the proposal to increase taxes on all imports could hurt domestic industry.  Although the retail groups argue that border tax adjustments could raise consumer prices, as the letter states the real problem is the impact of higher raw material costs on downstream US production:

“Companies that rely on global supply chains would face huge business challenges caused by increased taxes and increased cost of goods, which would in turn likely result in reductions in employment, reduced capital investments and higher prices for consumers.”

Congress does not care if prices for consumer products go up a few dollars at Walmart, but what happens when US downstream producers in Congressional districts are forced to close down because of higher raw material costs.  As one friend, who represented a major steel producer for years, told me, the total employment in the entire Steel industry is less than one high tech company and yet we want to protect the Steel industry at the expense of downstream high value added US production?

TRUMP APPOINTS WILBUR ROSS A PRAGMATIST TO BE COMMERCE DEPARTMENT SECRETARY

As indicated above, President Elect Donald Trump has announced that he will appoint billionaire investor Wilbur Ross as the next Secretary of Commerce.  Ross is a pragmatist, not an ideologue, who understands and values the problems of the working class more than other capitalists.  As Ross states in the following video http://www.theepochtimes.com/n3/1750905-billionaire-investor-wilbur-ross-on-the-people-factor-in-investing/:

“That man who has stood behind a machine for 15 or 20 years, he knows better than the people who built it, how to get more productivity out of it. So you need   to create an environment where he feels someone will pay attention if he makes a suggestion, and if it turns out to be a good suggestion, that he’ll be rewarded for it.”

Ross, worth $2.9 billion according to Forbes, has made his name in distressed assets investments and rose to fame turning around Bethlehem Steel for a short time as well as Burlington Industries.  Ross also worked closely with labor unions, stating:

“There’s a big misconception in management–labor relations throughout the industrial world; too often management and labor view each other as adversaries. We truly view labor as our partner because they only have one company they’re working with and we only have one group of workers.

So we think it’s very important that we have a good, functional relationship. We don’t negotiate with unions having a big battalion of lawyers and accountants and human relations people. We tend to negotiate mano-a-mano with the union leadership. Once we’ve worked out the essence of the deal, we then turn it over.”

Ross probably knows the Rust Belt better than any politician, one of the reasons why President-elect Trump picked him.   In the early 2000s he combined Acme Steel, LTV Steel, and Bethlehem Steel saving all of them from bankruptcy for a short period of time and returning the employees to the job but under new work rules and with 401(k)s instead of pensions.

Meanwhile, in early 2000, China suddenly had an insatiable demand for steel, combined with the U.S. automakers’ zero-percent financing push.  American steel was suddenly red hot. The price per ton of rolled steel soared and Ross took the new entity, ISG, public in December 2003.  Ross then sold ISG combined entity to Indian steel giant Mittal in 2005 for $4.5 billion.  As Ross stated:

“It’s nice being the chairman of a huge company in a vital industry. But it’s nicer to make fourteen times your initial investment in just two years.”

Eventually, however, Bethlehem Steel fell into bankruptcy.

OPEN LETTER TO NEW COMMERCE DEPARTMENT SECRETARY WILBUR ROSS— ONLY TRADE REMEDY PROGRAMS THAT SAVE US COMPANIES—TAA FOR FIRMS/COMPANIES AND MEP

The Honorable Wilbur Ross

New Commerce Department Secretary Trump Administration

Re: Trade Adjustment Assistance for Firms/Companies and MEP– Only Trade Remedy Programs That Save US Companies

Dear Secretary Ross,

The Press reports that President-elect Donald Trump has nominated you to be the next Commerce Department secretary.  Your expertise in working with bankrupt US companies, such as Bethlehem Steel, gives the United States a unique chance to make its industry great again.

In the 1980s during the Reagan Administration, I worked at the Commerce Department and before that at the US International Trade Commission.  Since the 1980s, I have represented many US importers/foreign producers in international trade cases, including metal, chemical and steel products, and am now on the Board of Directors of the Northwest Trade Adjustment Assistance Center in Seattle, Washington, which provides assistance to US companies injured by imports.

In my experience, ultimately these unfair trade cases do not work.  Although they provide a breathing space, they do not save the companies and the jobs that go with them.  Importers simply switch to a new country.  Both of us have experience with Bethlehem Steel, which had 40 years of trade protection from steel imports through various antidumping and other trade orders.  Where is Bethlehem Steel today? Green fields.

But trade cases also create enormous collateral damage in downstream industries that need competitive raw material inputs.  Many US companies may use the cases to hide behind protectionist walls.  The “hunker down” mindset is not in America’s DNA.  Instead, this nation’s manufacturing businesses need to regain the competitive dynamism they once possessed. We need a new aggressive US manufacturing policy unleashing American global competitiveness to make companies strong enough to not only survive, but thrive in the US market.

A starting point would be for the Commerce Department to build upon two existing programs that have proven track records of success in this area that can be quickly ramped up and can have an immediate and tangible impact on the 250,000 small and medium manufacturing companies which serve as the bases of our supply chain: EDA’s Trade Adjustment Assistance for Firms /Companies (“TAAF”) and NIST’s Manufacturing Extension Partnership Program (“MEP”) (inexplicably, these programs have been marginalized by the Obama Administration).  TAAF has 11 regional (multi-state) TAAF Centers but the program has been cut to only $12.5 million annually. The system has the band-width to increase to a run rate of $50 million.  Projecting a four-year ramp up of $90 million (FY18-FY21), the TAA program could serve an additional 2,150 companies.

No federal funds go to any companies in the program. In fact, companies are required to pay into the program by matching any federal monies on a dollar-for-dollar basis. This sharing of costs between Uncle Sam and the companies creates a pool of seed dollars subsequently used to hire outside professionals. These professionals create a series of knowledge-based projects aimed at permanently upgrading key business processes over the span of several years. Here’s the kicker – the program does not block imports in any way.

Does it work? Yes it does. In the Northwest, where I am located, the Northwest Trade Adjustment Assistance Center has been able to save 80% of the companies that entered the program since 1984. The Mid-Atlantic Trade Adjustment Assistance Center, uses a video, http://mataac.org/howitworks/, to show in detail how the program resulted in significant turnarounds for four companies. The reason the TAA for Firms/Companies is so successful—Its flexibility in working with companies on an individual basis to come up with a specific adjustment plan to make them competitive once again in the US market as it exists today.  For a sample recovery plan, see http://mataac.org/documents/2014/06/sample-adjustment-plan.pdf, which has been developed specific to the strengths, weaknesses and threats each company faces.

NIST’s MEP program provides high quality management and technical assistance to the nation’s small manufacturers through independent Centers in every State and Puerto Rico, staffed by non-federal advanced manufacturing experts and is one of the remedies suggested by TAAF.  MEP reaches nearly 30,000 firms each year, and works intensively (think “McKinsey for manufacturers”) with nearly 10,000 of them.  As a consequence of a just completed nation-wide reinvention and reform of the program, MEP is positioned to assist even more companies.  Currently funded at $130 million, a commitment of $100 million over four years would serve an additional 8400 firms.  These funds could be targeted to those small and medium enterprises that are the base of our domestic supply chain, critical to your overall reshoring agenda.  Like the TAAF program, no MEP funds go directly to the companies, which instead are required to cost share the cost of expert consultants.  They have “skin in the game”.

Increasing funding will allow the TAA for Firms/Companies and the MEP programs to expand their bandwidth and provide relief to larger enterprises, including possibly even steel producers.  If companies that use steel can be saved, why can’t those who produce it?

Attached is a longer proposal on how to expand TAA for Firms/Companies and the MEP Program to make US companies more competitive again.

I wish you great success in your new appointment.  It gives me a level of confidence for the future of America’s manufacturing base that hasn’t been felt for quite some time.

I hope that the above has been of some interest. I would consider it an honor to expand on it in person if you think it appropriate.

Very truly yours,

William Perry

CHINA SUES US AND EC IN WTO FOR FAILURE TO GIVE CHINA MARKET ECONOMY STATUS IN AD AND CVD CASES ON DECEMBER 11, 2016

As indicated in past blog posts, pursuant to the China WTO Accession Agreement, from the Chinese point of view December 11, 2016 is the date when countries can no longer treat China as a nonmarket economy country under their antidumping (“AD”) and countervailing duty (“CVD”) law.  Neither the United States nor the EC declared China a market economy country on December 11th so predictably China has filed a WTO complaint against the US and EC over their price comparison methodologies used in their AD and CVD laws.

On December 12, 2016, in the attached notice, wto-2016-news-items-china-files-wto-complaint-against-us-eu-over-price-comp, the WTO announced:

“China notified the WTO Secretariat that it had requested dispute consultations with the United States and the European Union regarding special calculation methodologies used by the US and EU in anti-dumping proceedings.”

Pursuant to US antidumping law, since China is a nonmarket economy country, Commerce refuses to use actual prices and costs in China to determine whether a Chinese company is dumping.  Instead Commerce constructs a cost for the Chinese company using consumption factor information from China and “surrogate” values from import statistics in 5 to 10 different surrogate countries. In its proceedings, the Commerce Department can choose value data from different countries between a preliminary and final determination and between initial investigation to review investigation.   Because of the numerous surrogate values from many different surrogate countries, it is impossible for the Chinese company, never mind the US importer, to know whether the Chinese company is dumping.

As former USTR General Counsel Warren Maruyama recently stated:

“The nonmarket economy methodology tends to generate extremely high margins and a lot of Chinese companies have basically concluded that it’s futile to defend NME cases, so this is a dispute with extremely high stakes for both sides.”

The controversy surrounds Section 15 of the China WTO Accession Agreement, which originated from the US China WTO Accession Agreement, which provides:

Price Comparability in Determining Subsidies and Dumping . . .

(a) In determining price comparability under Article VI of the GATT 1994 and the Anti-Dumping Agreement, the importing WTO Member shall use either Chinese prices or costs for the industry under investigation or a methodology that is not based on a strict comparison with domestic prices or costs in China based on the following rules: . . .

(ii) The importing WTO Member may use a methodology that is not based on a strict comparison with domestic prices or costs in China if the producers under investigation cannot clearly show that market economy conditions prevail in the industry producing the like product with regard to manufacture, production and sale of that product. . . .

(d) Once China has established, under the national law of the importing WTO Member, that it is a market economy, the provisions of subparagraph (a) shall be terminated provided that the importing Member’s national law contains market economy criteria as of the date of accession. In any event, the provisions of subparagraph (a)(ii) shall expire 15 years after the date of accession.  In addition, should China establish, pursuant to the national law of the importing WTO Member, that market economy conditions prevail in a particular industry or sector, the non-market economy provisions of subparagraph (a) shall no longer apply to that industry or sector.

In other words, pursuant to the China WTO Accession Agreement, Commerce’s right to us a nonmarket economy methodology in Article 15 (a)(ii) “shall expire 15 years after the date of accession”.  China acceded to the WTO on December 11, 2001 so Section 15(d) should have taken effect on December 11, 2016, but did not.

But where did the 15 years come from?  It came from a demand by the United States in the 2000 US China WTO negotiations and the resulting US-China WTO Accession Agreement. In fact, several years ago, former USTR Charlene Barshefsky, who negotiated the US China WTO Agreement, was asked at a conference in Beijing where the 15 years came from.  Her response was that she knew what she needed to get from the Chinese government to get the Agreement through Congress.  A USTR negotiator once told me that, in fact, this was “nonnegotiable demand” from the US government.  So you would think that the US government would follow the Agreement it negotiated with China and the demand that it made of the Chinese government.  Not so fast.

The United States’ apparent position is that although the 15 years was demanded by the US, since the 15 years is in not in a Treaty approved by Congress, the US does not have to follow the provision because it is not in the US Antidumping and Countervailing Duty law.

Iran has market economy status and has always been considered a market economy country.  Although once classified as nonmarket economy countries, Russia and Ukraine have market economy status under the US antidumping law.  Why and how did they become market economy countries?

For Russia, it was 911.  As a result, of the 911 attack the US government wanted Russian bases to attack Afghanistan.  President Putin told the United States Government make Russia a market economy country under the US antidumping law.  Secretary Evans of Commerce flew into Russia and said looks like a market economy to me.  See http://news.bbc.co.uk/2/hi/business/2032498.stm; http://www.themoscowtimes.com/business/article/washington-mulls-status-of-russias-economy/247431.html; http://www.russialist.org/archives/5545-4.php.

As CBS news stated about the announcement:

The Russian leader has aggressively pursued closer ties with the West since the Sept. 11 terrorist attacks, and many analysts had predicted the United States would grant Russia market economy status and help in its WTO bid in exchange for Putin’s strong support for the U.S.-led campaign in Afghanistan.

http://www.cbsnews.com/news/russia-joins-club-capitalism/

Sources in China reported that when he learned about the decision then Premier Zhu Rongyi in China was extremely angry, stating how could Russia get market economy before China?  The answer—politics and the Chinese know it.

What about Ukraine?  How did it get market economy?  Orange Revolution.  On February 17, 2006, Commerce determined that Ukraine is a market economy country.  See http://www.trade.gov/press/press_releases/2006/ukraine_021706.asp; 71 Fed. Reg. 9520 (February 24, 2006).

Regarding China’s challenged in the WTO, Nicholas R. Lardy, a senior fellow at the Peterson Institute for International Economics, recently stated:

“I think this is potentially far more significant than most trade disputes … because the Chinese believe, with some justification, that they were promised something both verbally and in writing back at the time when they were negotiating their accession and now both Europe and the United States are walking away from it.”

SOLAR CELLS FROM CHINA PRELIMINARY DETERMINATION

On December 19, 2016, the Commerce Department issued the attached preliminary determination, 2014-2015-solar-cells-from-china-preliminary-determination, in the 2014-2015 antidumping revivew investigation on Solar Cells from China.  Trina received an antidumping rate of 7.72%, Canadian Solar 30.42% and separate rate companies received a rate of 13.97%, the weighted average of Trina and Canadian Solar’s dumping rates.  These are just preliminary rates and those rates can change in six months in a preliminary determination.

SOLAR CELLS FROM CHINA REVIEW INVESTIGATION STARTS THIS MONTH

As indicated in the attached Commerce Department review notice, december-2016-commerce-opportunity-to-request-reviews, this is the month to request review investigations in the Solar Cells ( formal name “Crystalline Silicon Photovoltaic Cells”) from China case.  Requests for review investigation must be filed at the Commerce Department by December 31st.

There has been much confusion about the difference between the Solar Cells case and the Solar Products (formal name “Crystalline Silicon Photovoltaic Products”) case.

The Solar Cells from China case covers exports and imports of Chinese Solar Panels with Chinese produced solar cells in them. The anniversary month is December to request a review investigation and the review period will cover imports and sales of Solar Cells to the United States during the period December 1, 2015 to December 31, 2016.

The Solar Products from China case covers exports and imports of Chinese Solar Panels with foreign produced solar cells in them. The anniversary month is February to request a review investigation and the review period will cover imports and sales of Solar Products to the United States during the period February 1, 2016 to January 31, 2017.

NEW HARDWOOD PLYWOOD AD AND CVD CASE AGAINST CHINA

On November 18th, the Coalition for Fair Trade in Hardwood Plywood and its individual members: Columbia Forest Products (Greensboro, NC), Commonwealth Plywood Inc. (Whitehall, NY), Murphy Plywood (Eugene, OR), Roseburg Forest Products Co. (Roseburg, OR), States Industries, Inc. (Eugene, OR), and Timber Products Company (Springfield, OR) filed an AD and CVD case against imports of hardwood plywood from China.

On December 9, 2016, in the attached factsheet, factsheet-prc-hardwood-plywood-products-ad-cvd-initiation-120916, the Commerce Department initiated the AD and CVD cases.  To get a separate antidumping rate in the AD case, Chinese companies must submit a quantity and value questionnaire by December 22, 2016 and a separate rates application by January 13, 2017.

If anyone has any questions about this process, please feel free to contact me.

STEEL TRADE CASES

On November 30, 2016, in the attached factsheet, factsheet-multiple-clt-plate-ad-final-113016, Commerce announced its affirmative final determinations in the AD investigations of imports of certain carbon and alloy steel cut-to-length plate from Brazil, South Africa, and Turkey.  The Brazil AD rate is 74.52%.  The South African rate ranges from 87.72% to 94.14%.  The Turkey rate ranges from 42.02% to 50%.

FOREIGN ANTIDUMPING AND COUNTERVAILING DUTY LAW AND CASES

UNIVERSAL TRADE WAR CONTINUES

With the election of Donald Trump, as stated in my last newsletter, the Universal Trade War will continue.  In addition to the US bringing AD and CVD cases, countries around the World, such as EC, Canada, Mexico, Brazil, Argentina, India, Turkey, Ukraine, Russia, China, Indonesia, Malaysia, Korea, Japan, Taiwan, Australia, Thailand, South Africa, and Vietnam, all are filing antidumping and countervailing duty cases against each other and the United States.  These countries have adopted the US law which finds dumping in 90% of the cases.  The US and the EC have created a Frankenstein in the antidumping law and the whole World has adopted it.

Compromise is the best way to settle trade disputes, but it is very difficult, if not impossible, to settle US antidumping and other trade cases.  What is “fair” trade for the United States is “fair” trade for every other country.  Many countries want to make their industries Great again.

Because of this situation, this part of the newsletter will concentrate on trade cases in other countries and how other countries see the trade problem with the United States.

CHINA

HOW THE CHINESE GOVERNMENT CAN RETALIATE

What Happens When Trump Starts a Trade War with China

By Adams Lee, Partner, Harris Bricken

During the campaign, Donald Trump said “we can’t continue to allow China to rape our country” and vowed to aggressively fight back against China’s unfair trade practices. Trump promised his trade agenda would:

(1) declare China to be a currency manipulator,

(2) impose a 45 percent tariff on all Chinese imports into the U.S.,

(3) abandon/ renegotiate “bad” trade agreements such as the Trans-Pacific Partnership (TPP), and

4) use the full arsenal of US trade laws against Chinese unfair trade practices.

President-elect Trump’s trade actions likely will raise many legal and policy questions.  Can he really do that? Should he do that? Will those actions achieve anything? Pundits, academics, lawyers, and ultimately U.S. judges will weigh in on these questions, but it is fair to assume China will not wait for the resolution of these questions.  Instead China likely will retaliate with its own actions. This post looks at three possible ways China could respond to any attempts under the Trump administration to get tough against China.

  • China’s AD/ CVD Actions

Unbeknownst to many, China has initiated many of its own antidumping (AD) and countervailing duty (CVD) actions against the United States and other countries.  Having been on the receiving end of the most number of AD/CVD actions worldwide, China has incorporated into its own AD/CVD procedures some of the most effective techniques and practices from the AD/CVD investigations conducted by the U.S., EU, and other jurisdictions. For example, China’s AD questionnaires have burdensome and comprehensive sales and cost data requests, similar to, and even exceeding US practice. China’s AD/CVD margin calculation methodologies are as non-transparent as the EU’s margin calculations. China has even copied many of the annoying administrative practices of the US and EU such as giving only limited extensions, disregarding national holidays, or insisting on burdensome filing requirements (e.g., all documents of all filings must be fully translated into Chinese).

To date, China’s AD/CVD actions have largely been symbolic and timed to be initiated after specific U.S. actions against China.  Although many of China’s AD/CVD cases have involved well-known companies (e.g., Corning, Dupont, Tyson Foods, Cadillac), most of these cases have had only limited economic impact. For example, in 2010, China imposed AD/CVD duties against U.S. chicken broiler products after the U.S. imposed special safeguard duties against Chinese tires in 2009. Most of the U.S. exports to China were of chicken feet, which had limited demand in the U.S., other than as a byproduct to make animal feed.

More recent China AD/CVD actions, however, have had greater strategic economic impact.  After the US and EU filed AD/CVD actions against Chinese solar cells and modules in 2011, China retaliated by initiating its own AD/CVD actions against solar-grade polysilicon from the United States, EU and Korea. China’s AD/CVD action effectively closed off the largest export market for US polysilicon producers, and was a significant contributing factor to REC Silicon’s decision to shutter its polysilicon production operations in Washington and Montana.

Even more recently, China in late September announced preliminary AD duties of 33.8% and CVD duties of up to 10.7% against imports of U.S. distillers dried grains (DDGS), an ethanol by-product used as animal feed. The U.S exported $1.6 billion of DDGS to China in 2015.

China apparently already has an AD/CVD action prepared against U.S. soybeans exports to China and is just waiting for the right time to initiate the action. The U.S. is the largest producer and exporter of soybeans and exported over $10 billion of soybeans to China in 2015.  If Trump wants to get tough against China, US soybean producers may well become collateral damage in the latest round of the escalating US-China trade war.

  • China’s Antitrust Enforcement

Another option for China to respond against any anti-China trade actions from the U.S. would be through the enforcement of its antitrust laws.  Although China implemented its anti-monopoly law only in 2008, China has become increasingly active in reviewing mergers and investigating abuse of market dominance. In February 2015, Qualcomm paid $975 million fine to settle Chinese antitrust investigations into its alleged abuse of market dominant position.  In 2016, China’s antitrust authorities have targeted pharmaceuticals, medical devices, vehicle manufacturing, ocean shipping, and smart manufacturing as industries of particular concern.  U.S. companies operating in these industries should be aware of possible dawn raids of its corporate offices in China and other enforcement action by Chinese antitrust authorities. Because these industries are already prioritized for extra scrutiny, China could ramp up its antitrust enforcement actions as an indirect way to retaliate quickly against Trump’s actions against China.

  • China’s Criminal Enforcement

China could also retaliate by simply enforcing its own criminal laws against foreign (i.e., U.S.) company officials while in China. Earlier this month, China detained at least three employees of Crown Resorts, Ltd, an Australian gambling company, and will be pursuing criminal charges because under Chinese law casinos are not allowed to promote gambling in China or organize groups to go to casinos overseas. No one knows where and when the next China anti-corruption effort will occur, but foreign companies doing business in China in important or politically sensitive industries need to be extra cautious.  Company officials need to know which way the wind is blowing in China, particularly when Trump’s enflamed trade rhetoric may trigger Chinese backlash.

So far, although Trump has talked a lot about China, China has taken the high road noting that U.S.-China trade relations are “too big to fail”. China appears to be waiting to see if Trump’s actions will in fact harm China.  For example, Trump’s decision to abandon the Trans-Pacific Partnership actually opens the door for China to step in and fill the TPP void by promoting its own regional trade agreement (RCEP – Regional Comprehensive Economic Partnership).  If, however, Trump does do anything that China considers excessive, it would be naïve to think China will do nothing.  Unlike the U.S.-Japan trade wars from the 1980s, China has a home market that is often the biggest export market for US producers. China has many options under its own laws to directly or indirectly retaliate against U.S. interests.  Anyone wishing to do business in China or with China should consider these risks that they could be targeted for symbolic retaliation in a spiraling US-China trade war.

CHINA AD/CVD NEWSLETTERS

Attached are newsletters teams-newsletter-en-vol-2016-44, teams-newsletter-en-vol-2016-45 teams-newsletter-en-vol-2016-46, from Chinese lawyer Roland Zhu and his trade group at the Allbright Law Office.

CANADA

LUMBER FROM CANADA CASE COMES BACK

On November 25, 2016, the Committee Overseeing Action for Lumber International Trade or Negotiations, the domestic lumber companies, filed an antidumping and countervailing petition against softwood lumber products from China.  In the attached notice, factsheet-canada-softwood-lumber-productsad-cvd-initiation-121616, on December 16, 2016, the Commerce Department initiated an antidumping and countervailing duty case on solftwood lumber products from Canada.

THE CANADIAN VIEW

In attached footnoted article, trumpnaftafinal, Dan Kiselbach, a well-known Canadian Trade and Customs lawyer, at Deloitte Tax Law in Vancouver, Canada discusses whether and how Trump can cancel NAFTA.

MEXICO

MEXICAN ANTIDUMPING CASE—CARBON STEEL TUBE FROM KOREA, SPAIN AND UKRAINE.

On December 15, 2016, in the attached notice in Spanish, dof-15-dic-16-resolucion-inicio-investig-antidumping-import-tuberia-de-a, the Mexican Government started up its own antidumping investigation against imports of carbon steel tube from Korea, India, Spain and Ukraine.  A large number of US companies have been named as respondent exporters.  All the exporters are named in pages 7 to 11 of the notice.

In the attached memorandum, carbon-steel-pipe-and-tube-mexicowhich will be attached in full on my blog, www.uschinatradewar.com, David Hurtado Badiola, a well known Mexican Trade and Customs lawyer, at Jauregui y Del Valle, S.C. in Mexico states:

Antidumping investigation on seamless carbon steel pipes, originating in Korea, Spain, India and Ukraine.

Below is a summary of the Initial Antidumping Resolution on seamless carbon steel pipes, produced in Korea, Spain, India and Ukraine, published today on the Federal Official Gazette.

The investigation is initiated today for importations of steel pipes described below, carried out at alleged dumping prices.

The products included in the investigation are seamless carbon steel pipes, with different diameters and thicknesses, classified under the following tariffs are:

Tariff fraction Description
Chapter 73 ARTICLES OF IRON OR STEEL
Heading 7304

Tubes, pipes and hollow profiles, seamless, of iron (other than cast iron) or Steel.

Line pipe of a kind used for oil or gas pipelines

Subheading 7304.19 Other

Tariff

7304.19.01

Hot-rolled tubes, uncoated or other surface-worked work, including Hot-drawn or lacquered: of an external diameter not exceeding o equal to 114.3 mm and a wall thickness equal to or exceeding 4 mm without exceeding 19.5 mm

Tariff

7304.19.02

Hot-rolled tubes, uncoated or other surface-worked work, including Hot-drawn or lacquered: of an external diameter

exceeding 114.3 mm but not exceeding 406.4 mm and having a wall thickness of 6,35 mm or more but not exceeding 38.1 mm .

Tariff

7304.19.99

The others.
Subheading 7304.39 Others, of circular cross-section, of iron or non-alloy steel:
Others.

Tariff

7304.39.05

Tubes known as “thermal” or “conducting” tubes, uncoated or surface-worked, including pipes called thermal or conducting, lacquered or varnished: of an external diameter not exceeding or equal to 114.3 mm and having a wall thickness equal to or greater than 4 mm, not to exceeding 19.5 mm.

Tariff

7304.39.06

Tubes known as “thermal” or “conducting” tubes, uncoated or surface-worked, including pipes called thermal or conducting, lacquered or varnished: of an external diameter greater than 114.3 mm not exceeding 406.4 mm and having a wall thickness equal to or greater than 6.35 mm, not to exceeding 38.1 mm.

Tariff

7304.39.99

Others.

There are two different periods covered in an antidumping investigation: (i) the investigated period and (ii) the analyzed period.

The investigated period covers importations from April 1, 2015 to March 31, 2016.

The analyzed period is a longer period that covers importations from April 1, 2013 to March 31 2016. This period is used to analyze injury caused by imports at dumping prices.

Every exporter that appears and files the information required is entitled to have its own dumping margin calculated.

Those exporters that do not appear or did not export in the investigated period shall be subject to the “all others rate”, equivalent to the highest duty imposed to the exporters of their country.

The term to file information in the official questionnaire and defense arguments expires on February 9, 2017.

If anyone is interested in participating in the case, please let me know and I will put them in touch with Mexican trade counsel.

COMPUTER HACKING

US AND CHINA MEETING

On December 8, 2016, the Justice Department issued a notice, on the recent high level Joint Dialogue between the United States and China on Cybercrime and Related Issues, which states:

Joint Summary of Outcomes

Yesterday, Attorney General Loretta E. Lynch and Department of Homeland Security Secretary Jeh Johnson, together with Chinese State Councilor and Minister of the Ministry of Public Security Guo Shengkun, co-chaired the third U.S.-China High-Level Joint Dialogue on Cybercrime and Related Issues. The dialogue aims to review the timeliness and quality of responses to requests for information and assistance with respect to cybercrime or other malicious cyber activities and to enhance pragmatic bilateral cooperation with regard to cybercrime, network protection and other related issues.

Both sides endorse the establishment of the dialogue mechanism as beneficial to bilateral communication and enhanced cooperation, and believe that further solidifying, developing and maintaining the dialogue mechanism and continuing to strengthen bilateral cooperation in cybersecurity is beneficial to mutual interests.

The outcomes of the third dialogue are listed as below:

  1. Combatting Cybercrime and Cyber-Enabled Crime. Both sides re-commit to cooperate on the investigation of cyber crimes and malicious cyber activities emanating from China or the United States and to refrain from cyber-enabled theft of intellectual property with the intent of providing competitive advantages to companies or commercial To that end, both sides:
    • Plan to continue the mechanism of the “Status Report on S./China Cybercrime Cases” to evaluate the effectiveness of case cooperation.
    • Affirm that both sides intend to focus cooperation on hacking and cyber-enabled fraud cases, share cybercrime-related leads and information with each other in a timely manner, and determine priority cases for continued law enforcement cooperation. Both sides intend to continue cooperation on cases involving online distribution of child Both sides seek to expand cyber-enabled crime cooperation to counter Darkweb marketplaces’ illicit sale of synthetic drugs and firearms.
    • Seek to provide concrete and timely updates on cases brought within the ambit of the
    • Exchanged views on existing channels of multilateral cooperation, and intend to continue exchanges regarding this
  2. Network Both sides acknowledged the network protection seminar held in August 2016 in China, and believe that enhancing network protection is beneficial to both sides. Both sides suggest holding regular network protection working-level meetings, either remotely or in-person, the next of which should be planned for 2017. Both sides seek to promote the protection of our respective networks through multiple methods. To that end, both sides:
    • Plan to enhance network hygiene by promoting the cleaning and patching of malware infections in our respective networks and promoting best network protection
    • Propose to engage in regular reciprocal sharing of malicious IP addresses, malware samples, analytic products, and other network protection information, and to develop standard operating procedures to guide network protection
    • Seek to assess the effectiveness of information shared and provide substantive feedback to each side regarding the utility of that
    • Plan to provide Principals with regular summaries of network protection
    • Intend to continue discussion on future cooperation concerning cybersecurity of critical infrastructure, and to provide timely assistance on cybersecurity incidents impacting critical
    • Intend to hold, as early as possible in 2017, a S.-China government and technology company roundtable to discuss cybersecurity issues of mutual concern.
  3. Misuse of Technology and Communications to Facilitate Violent Terrorist Activities. Both sides acknowledged the seminar on misuse of technology and communications to facilitate violent acts of terrorism held in November 2016 in China, and decided to continue cooperation on information sharing in countering the use of the Internet for terrorist and other criminal Both sides will consider holding a second seminar in 2017.
  4. Hotline Both sides welcomed the launch of the U.S.-China Cybercrime and Related Issues Hotline Mechanism, and decided to continue to use the hotline in accordance with the Work Plan. Both sides will conduct routine review of the use of the hotline.
  5. Dialogue Both sides recommend that the dialogue continue to be held each year, and that the fourth dialogue occur in 2017.

SECTION 337 AND IP CASES

NEW 337 CASES AGAINST CHINA

ARROWHEADS WITH ARCUATE BLADES

On December 2, 2016, in the attached ITC notice, arcuate-arrowheads, Flying Arrow Archery, LLC filed a section 337 patent case against Alice, China; Dongguan hong Song hardware alma iao, China; Huntingsky, China; liu, China; Jianfeng Mao, China; In-Sail Sandum Precision Industry (China) Co., Ltd., China; Arthur Sifuentes, Spring, Texas; Taotao (IT60), China; Wanyuxue, China; Wei Ran, China; YanDong, China; and Zhou Yang, China.

LIQUID CRYSTAL eWRITERS AND COMPONENTS THEREOF

On December 8, 2016, in the attached ITC notice, liquid-crystal, Kent Displays, Inc. filed a section 337 patent case against Shenzhen Howshow Technology Co., Ltd., (d/b/a Shenzhen Howshare Technology co., Ltd., d/b/a Howshare), China; and Shenzhen SUNstone Technology Co., Ltd., (d/b/a iQbe, China).

If you have any questions about these cases or about Trump and Trade, international taxes, US trade policy,  the antidumping or countervailing duty law, trade adjustment assistance, customs, False Claims Act or 337 IP/patent law, please feel free to contact me.

Best regards,

Bill Perry

US CHINA TRADE WAR–DEVELOPMENTS TRADE, CUSTOMS, PATENTS, US/CHINA ANTITRUST AND SECURITIES

Suzhou Garden of the Humble Administrator ChinaNovember 29, 2013

ANNOUNCEMENT

On December 3, 2013, former Congressman Don Bonker of APCO and I will be speaking in Vancouver, Canada at a breakfast conference held by the American Chamber of Commerce on “The Trans-Pacific Partnership Demystified: A Discussion of Trade Opportunities for American and Canadian Businesses”.

Attached is a copy of the Speech announcement. Hope to see some of you in Vancouver, Canada.  AMCHAM – Dec 3 TPP Event – INVITE (2)

“TRADE IS A TWO WAY STREET”

NEWSLETTER

Dear Friends,

There have been some major developments in the trade, Customs fraud, patents, US/Chinese antitrust, and securities areas.

I have just returned from a trip of more than 2 weeks in China.  While in China, we discussed US and Chinese antidumping and antitrust cases and other US Litigation against Chinese companies along with the US Importers Lobbying Coalition.  In addition, we circulated the attached PowerPoint description in English and Chinese of Dorsey’s Trade and Litigation Team.  FINAL CHINA TRADE LITIGATION POWERPOINT NOV 2013 Final CHINESE China Trade Litigation PowerPoint Nov 2013

TRADE

SOLAR CELLS ANTIDUMPING AND COUNTERVAILNG DUTY CASE—SETTLEMENT AND THIRD COUNTRY CELLS LOOPHOLE

Apparently, negotiations between the US and China in the Solar Cells case have slowed down because there have been no further developments that have been announced publicly.

Meanwhile, however, the U.S. Department of Commerce and Customs are continuing to press Chinese exporters and US importers of solar panels to demonstrate that their imports of Chinese modules and panels fall outside of existing antidumping (AD) and countervailing duty (CVD) orders by proving that they contain solar cells in the Chinese panels and modules that are produced in third countries.

Solar cells produced in countries, such as Taiwan and Malaysia, fall outside the scope of the trade remedy orders imposed by Commerce, even if they are assembled into modules and panels and shipped by companies in China. Many Chinese companies – even those that manufacture cells – have thus begun incorporating cells made in third countries in order to make sure those products shipped to the U.S. are not affected.

As mentioned in my last post, the Commerce Department continues to investigate, but has not launched a formal circumvention inquiry yet.  In addition to Commerce, Customs is requiring similar documents to prove that the solar cells were actually produced outside of China.  On November 16, 2013, USTR Michael Froman said that a close partnership between USTR and U.S. Customs and Border Protection (“CBP”) was the key to enforcing trade duty orders against Chinese solar panels.

After touring the Los Angeles port the USTR said in a statement that the U.S. takes a “whole-of-government” approach to trade enforcement. As one example, the USTR explained that his office and Customs had partnered to protect the U.S. solar industry by challenging unfair trade practices on the part of China through disputes at the World Trade Organization and enforcement of U.S. trade remedy laws.

“When it comes to solar, the Obama administration is enforcing U.S. trade remedy laws and U.S. rights under WTO agreements,” Froman said. “At the same time, [Customs] is stepping up reviews of imports of solar panels from China to determine whether they are improperly evading payment of antidumping and countervailing duties.”

USTR also pointed to the coming WTO multilateral negotiations in Bali on trade facilitation measures, which would  streamline customs procedures, and is “poised to close” the proposed Trans-Pacific Partnership with 11 other Pacific Rim countries.

Unfortunately, the November 27, 2013 reports are that the WTO multilateral negotiations in Bali have broken down, in part over the Trade Facilitation report, which means the Trans Pacific Partnership and other negotiations will become even more important.

ATTACK ON SUNTECH

On November 6, 2013, Solar World launched an attack in the Solar Cells case arguing that Commerce should raise Suntech’s antidumping cash deposit rate from 29.14 to 250% because it is now owned by a new company.  SOLAR SHUNFENG  In the attached submission, Solar World argues:

“On behalf of SolarWorld Industries America Inc. (“SolarWorld”), Petitioner in the above-captioned investigations, we respectfully request the U.S. Department of Commerce (“the Department”) to instruct U.S. Customs and Border Protection (“CBP”) to assess antidumping and countervailing duties on all entries of crystalline silicon photovoltaic cells, whether or not assembled into modules (“solar cells and modules”), imported into the United States by Shunfeng Photovoltaic International Ltd. (“Shunfeng”) or related entities at the PRC-wide rate of 249.96 percent and the All Others rate of 15.24 percent. . . .”

“Publicly available information now indicates that Suntech has ceased to exist as an independent entity and is thus no longer entitled to these separate rates. In March of this year, Suntech was forced into bankruptcy proceedings after defaulting on U.S. bond payments.  This month, Shunfeng, a mid-size solar manufacturer in China, announced that it won a bid to purchase the main unit of Suntech’s assets, i.e., Wuxi Suntech Power Co.  Reports indicate that Shunfeng has paid a deposit of CNY500 million ($82 million) to acquire Suntech, and is expected to pay an additional CNY2.5 billion (or $410 million).”

“In light of this acquisition, solar cells and modules produced by the former Suntech entity will now be imported into the United States by Shunfeng. While Shunfeng participated in the original investigation, it did not submit an application for a separate rate. Antidumping duties on imports of Chinese solar cells and modules from Shunfeng, therefore, are assessed at the PRC-wide rate of 249.96 percent, while countervailing duties are assessed at the All Others rate of 15.24 percent.”

“Given the recent asset acquisition, the PRC-wide and All Others rates now also apply to solar cells and modules manufactured by the former Suntech entity and imported by Shunfeng. Shunfeng is not entitled to Suntech’s separate rates absent a request for a changed circumstances review, a full investigation, and a final determination by the Department.  Indeed, based on publicly available information about the nature and structure of the transaction, in particular that Suntech’s assets were purchased out of bankruptcy, it is unlikely that Shunfeng would be entitled to Suntech’s separate rates.”

HARDWOOD PLYWOOD—NEGATIVE ITC INJURY DETERMINATION

On November 5, 2013, in a very surprising decision, the US International Trade Commission (“ITC”) reached a negative, no injury, no threat of material injury determination in the antidumping and countervailing duty case on hardwood plywood from China.  All five voting Commissioners reached a negative determination.

In its opinion, the Commission found that although subject import volume increased from 2010 to 2012, it did so solely at the expense of nonsubject imports and that there was no “significant correlation between subject import prices and the domestic industry’s prices or shipment volumes. Prices for the subject imports trended upward throughout the period of investigation for all six of the products.”

The ITC also determined that “the underselling did not cause a shift in volume from the domestic like product to the subject imports. To the contrary, for most of the pricing products, quarterly shipments of domestically produced hardwood plywood were greater in 2012 when total subject import volume was at its peak, than in 2010.  We also note that despite the prevalent underselling over the period of investigation, the domestic industry did not lose market share.  Rather, as discussed above, the domestic industry’s share of apparent U.S. consumption increased steadily throughout the period of investigation while lower‐priced subject imports also gained market share.  To the extent that subject imports gained market share, they did so at the expense of nonsubject imports and without depressing domestic prices. . . .”

“Most of the industry’s trade and employment indicators improved during the period of investigation, including in interim 2013 as the industry continued to recover from the recession. The domestic industry’s U.S. shipments increased steadily from 2010 to 2012 and were higher in interim 2013 than in interim 2012.”

Two factors that may have had an indirect impact on the case were the Commerce decision and the impact on downstream industries.

As mentioned in the last newsletter and blog, the Commerce Department used Bulgaria as the surrogate country to find dumping by Chinese hardwood plywood companies.

In addition, as indicated in past newsletters and blog posts, US downstream producers of kitchen cabinets, doors and windows have been very vocal in their opposition to these cases because of the very damaging effect any antidumping and countervailing duty orders on Chinese hardwood plywood could have on US downstream industries.

Although the ITC cannot take these two factors into direct account in their determination because they are not statutory factors to be considered, they could have an indirect effect and may have made certain ITC Commissioners more predisposed to reach a negative injury determination if there was a way to do so.

WOOD FLOORING — COMMERCE DEPARTMENT ANTIDUMPING REVIEW INVESTIGATION

Meanwhile, the Commerce Department has issued a preliminary determination in the first antidumping review investigation in the Wood Flooring from China case raising the antidumping rate slightly from 3.88% to 4.77%.  See the attached preliminary determination.  Wood_Flooring_AD Prelim_FR_signed_pub[2]

This decision will not have any actual impact on the US market, however, because it is only Commerce Department final determinations in review investigations that set new cash deposit and assessment rates for imports of wood flooring from China.

COMMERCE NEW SAMPLING METHODOLOGY

On November 4, 2013, the Commerce Department issued the attached Federal Register notice announcing that it was changing its respondent selection methodology in antidumping review investigations to include sampling. SAMPLYING NME METHODOLOGY COMMERCE  As it stands now, in choosing the “mandatory” respondents in antidumping review investigations, Commerce generally creates a list of the Chinese exporters during the relevant review period and picks the two or three largest exporters of the products under investigation during that period.

As mandatory respondents in antidumping review investigations, Chinese export companies must respond to the entire 100 page Commerce Department questionnaire and numerous supplemental questionnaires and be subject to Commerce Department verifications.   Because of the substantial added work, mandatory respondent companies can often pay more than $100,000 in legal fees.  Such high legal fees can cause smaller Chinese export companies simply to give up, which, in turn, can create enormous liability for US importers because of retroactive liability.

As the Department states in the attached Federal Register notice:

“As explained in the Proposed Methodology, when the number of producers/exporters (“companies”) involved in an AD investigation or review is so large that the Department finds it impracticable to examine each company individually, the Department has the statutory authority to limit its examination to: (1) A sample of exporters, producers, or types of products that is statistically valid  based on the information available to the administering authority at the time of selection, or (2) exporters and producers accounting for the largest volume of subject merchandise from the exporting country that can reasonably be examined.  The Department has, to date, generally used the second option in proceedings in which limited examination has been necessary. One consequence of this is that companies under investigation or review with relatively small import volumes have effectively been excluded from individual examination.”

“Over time, this creates a potential enforcement concern in AD administrative reviews because, as exporters accounting for smaller volumes of subject merchandise become aware that they are effectively excluded from individual examination by the Department’s respondent selection methodology, they may decide to lower their prices as they recognize that their pricing behavior will not affect the AD rates assigned to them.  Sampling such companies under section 777A(c)(2)(A) of the Tariff Act of 1930, as amended (the “Act”), is one way to address this enforcement concern. . . .”

“The statute requires that the sample be “statistically valid.”  The Department has interpreted this as referring to the manner in which the Department selects respondents.  Therefore, to ensure the statistical validity of samples, in the Proposed Methodology, the Department proposed employing a sampling technique that: (1) is random; (2) is stratified; and (3) uses probability-proportional-to-size (“PPS”) samples. Random selection ensures that every company has a chance of being selected as a respondent and captures potential variability across the population.  Stratification by import volume ensures the participation of companies with different ranges of import volumes in the review, which is key to addressing the enforcement concern identified above. Finally, PPS samples ensure that the probability of a company being chosen as a respondent is proportional to its share of imports in the respective stratum.”

“In general, the Department will normally rely on sampling for respondent selection purposes in AD administrative reviews when the following conditions are met: (1) There is a request by an interested  party for the use of sampling to select respondents; (2) the Department has the resources to examine individually at least three companies for the segment; (3) the largest three companies (or more if the Department intends to select more than three respondents) by import volume of the subject merchandise under review account for normally no more than 50 percent of total volume; and (4) information obtained by or provided to the Department provides a reasonable basis to believe or suspect that the average export prices and/or dumping margins for the largest exporters differ from such information that would be associated with the remaining exporters.”

COMMERCE NAME CHANGE—NOW ENFORCEMENT AND COMPLIANCE

On October 22, 2013, the Commerce Department changed the name of the organizational unit assigned to administer and calculate antidumping and countervailing duty rates from “Import Administration” to “Enforcement and Compliance.”  In the attached Federal Register notice, COMMERCE NAME CHANGE Commerce states that “The revision more accurately reflects the breadth of the agency’s activities with respect to the enforcement of, and compliance with U.S. trade laws and agreements.”

IMPORT ALLIANCE FOR AMERICA/IMPORTERS’ LOBBYING COALITION

As mentioned in prior newsletters, we are working with APCO, a well-known lobbying/government relations firm in Washington DC, on establishing a US importers/end users lobbying coalition to lobby against the expansion of the antidumping and countervailing duty laws against China.

On September 18, 2013, ten US Importers agreed to form the Import Alliance for America. The objective of the Coalition will be to educate the US Congress and Administration on the damaging effects of the US China trade war, especially US antidumping and countervailing duty laws, on US importers and US downstream industries.

We will be targeting two major issues—Working for market economy treatment for China in 2016 and working against retroactive liability for US importers. The key point of our arguments is that these changes in the US antidumping and countervailing duty laws are to help US companies, especially US importers and downstream industries. We will also be advocating for a public interest test in antidumping and countervailing duty cases and standing for US end user companies.

We are now contacting many US importers and also Chinese companies to ask them to contact their US import companies to see if they interested in participating in the Alliance.  Changes to the US antidumping and countervailing duty law against China can only happen because of a push by US importers and end user companies.  In US politics, only squeaky wheels get the grease.

CUSTOMS

HONEYGATE GOES ON

On November 15, 2013, the Justice Department announced that a Federal judge in Illinois sentenced Jun Yang, a U.S.-based honey broker, to three years in federal prison for his role in a scheme to evade nearly $38 million in antidumping duties on imports of Chinese honey into the U.S.  In March Jun Yang pled guilty to mislabeling Chinese honey and declaring falsely to Customs that the honey originated from India or Malaysia to avoid the antidumping duties on Chinese honey.  Yang has already paid $2.89 million in penalties to the US government.

According to Gary Hartwig, an agent with U.S. Immigration and Customs Enforcement’s Homeland Security Investigations unit “This is a significant sentence against a perpetrator of one of the largest food fraud schemes uncovered in U.S. history.  Together with our partners at Customs and Border Protection, we will continue to protect American industries from deceptive import practices, while facilitating the lawful flow of goods across our borders that is so critical to the U.S. economy.”

DOJ said that an undercover HSI agent helped uncover the scheme. Court filings show that Yang delivered 778 container loads of honey to processors and distributors that were falsely declared as Malaysian or Indian imports while knowing that all or some of the honey had originated in China.

Yang’s arrest was part of an ongoing government probe of Chinese honey smuggling operations that allegedly evaded a total of $180 million in antidumping duties.

NEW PATENT AND TRADEMARK CASES AGAINST CHINESE COMPANIES, INCLUDING HUAWEI, ZTE, AND OTHER COMPANIES

On October 31, 2013, Rockstar Consortium filed a patent case against Huawei.  ROCKSTAR HUAWEI

On November 7, 2013, Mobile Telecommunications Technologies filed a patent case against ZTE. ZTE CASE

On November 8, 2013, Secure Nova LLC filed a patent case against ZTE. SECURE ZTE CASE

On November 15, 2013, Bendpak filed a trademark, trade secrets, unfair competition case against Qingdao Lianhai Hydraulic Machinery Co. QINGDAOTMK

On November 26, 2013, Long Corner Consumer Electronics filed a patent case against Huawei. LONGCORNER HUAWEI

On November 26, 2013, Crossroads Systems Inc. filed a patent case against Huawei. CROSSROADS HUAWEI

On November 26, 2013, Memory Integrity filed a patent case against Hisense. HISENSE

ANTITRUST

VITAMIN C CASE

The Vitamin C case is wrapping up at the District Court level.

As mentioned in my last post, the October 16, 2013 proposed settlement agreement with China Pharmaceutical Group Ltd. and Weisheng Pharmaceutical Group Co., Ltd. provided for the payment of Plaintiffs’ legal fees of $7.8 million plus $1.5 million in expenses by the Chinese companies.  In other words, the Chinese respondent companies pay the legal fees of the US lawyers bringing the case.

On November 26, 2013, in the attached memorandum order and decision, VITAMIN C JUDGMENT the Federal Court rejected arguments by Hebei Welcome Pharmaceutical Co., Ltd. (“Hebei”) and North China Pharmaceutical Group Corp. (“NCPGC”) that as a matter of law they should not be found guilty under Section 1 of the Sherman Act for price fixing.  The effect of the Court’s decision is to leave in place a judgment of $153 million damages award against the two companies.

The most important part of the decision is the response to Hebei and NCPGC’s arguments that the Act of State, Foreign Sovereign Compulsion, and International Comity doctrines bar the jury’s verdict as a matter of law under the US antitrust law.  As the Court states in the attached decision on pages 1-3:

“First, defendants argue that the jury’s verdict against them is barred as a matter of law by the doctrines of act of state, foreign sovereign compulsion, and international comity.  In essence, defendants contend that the Court’s prior rulings that Chinese law did not compel defendants’ actions were erroneous and that plaintiffs’ claims never should have been brought before a jury.  . . . The Court stands by and reaffirms its prior rulings that Chinese law did not compel defendants to engage in antitrust violations, that the doctrines of act of state and international comity do not bar plaintiffs’ suit, and that it was inappropriate to present evidence about the meaning of Chinese laws to the jury. Nothing has changed from these pretrial rulings and defendants have stated no additional grounds to revisit them.”

“Moreover, defendants ignore that one purpose of the trial in this matter was to determine whether, regardless of what Chinese law authorized, defendants’ conduct was actually compelled by the Chinese government as a matter of a fact. Therefore, the Court instructed the jury that it was required to return a defense verdict if defendants proved, by a preponderance of the evidence, that the Chinese government actually compelled them to fix the price or limit the supply of vitamin C and defendants have not challenged this instruction.”

“There was ample evidence presented at trial from which the jury could have found that the Chinese government did not actually compel defendants’ decisions to fix the price and limit the supply of vitamin C – including evidence suggesting that the “verification and chop” mechanism did not actually compel defendants to enter into anticompetitive agreements and that the Vitamin C Subcommittee of the Chamber of Commerce of Medicines and Health Products Importers and Exporters (the “Chamber”) was a voluntary trade association. Moreover, in rejecting the compulsion defense, the jury necessarily assessed the credibility of witnesses’ testimony and, on a Rule 50(b) motion, the Court may not second-guess those determinations. . . .”

“Nor, despite defendants’ suggestion, was it error for the Court to exclude from the jury copies of Chinese laws and regulations and witness testimony about the meaning and content of those laws. Pursuant to Fed. R. Civ. P. 44.1, the determination of foreign law is a question of law. It is for the Court, not for the jury, to decide questions of law and the Court did so when it ruled that, as a matter of law, Chinese law did not compel defendants’ conduct. Accordingly, defendants’ renewed motion for judgment as a matter of law based on the act of state, foreign sovereign compulsion, and international comity doctrines is denied.”

The Court rejected the arguments of the two Chinese companies and in addition issued an injunction enjoining the Chinese companies from fixing prices in the future.

During my recent trip to China, many Chinese companies and the Chambers of Commerce simply did not realize that US judgments against Chinese companies can be enforced through Chinese bank branches in New York City.  We are presently representing a major Chinese bank in litigation in New York City in which the US lawyer, David Boies, is attempting to get money damages from the Chinese bank in China through its bank branch in New York city.  This same lawyer, David Boies, is a Plaintiff attorney in the Vitamin C case.

The times they are a changing and the Chinese companies should understand that they are now vulnerable to attacks from US litigation.

JAPANESE AUTO PARTS ANTITRUST CASES

On November 26 and 27, 2013, the Justice Department issued two announcements that Toyo Tire and Rubber TOYO GUILTY and Stanley Electric STANLEY ELECTRIC had agreed to plead guilty to price fixing on automobile parts installed in US cars.  Although these Auto Parts antitrust cases are against Japanese and Taiwan companies, they should be of interest to Chinese auto parts and other companies and US importers.

With regards to the plea by Toyo, the Justice Department issued the attached announcement stating:

“Japan-based Toyo Tire & Rubber Co. Ltd. has agreed to plead guilty and to pay a $120 million criminal fine for its role in two separate conspiracies to fix the prices of automotive components involving anti-vibration rubber and driveshaft parts installed in cars sold in the United States and elsewhere, the Department of Justice announced today.”

“According to a two-count felony charge filed today in U.S. District Court for the Northern District of Ohio in Toledo, Toyo engaged in a conspiracy to allocate sales of, to rig bids for, and to fix the prices of automotive antivibration rubber parts it sold to Toyota Motor Corp., Nissan Motor Corp., Fuji Heavy Industries Ltd. – more commonly known by its brand name, Subaru – and certain of their subsidiaries, affiliates and suppliers, in the United States and elsewhere.  . . .”

“In addition, according to the charge, Toyo engaged in a separate conspiracy to allocate sales of, and to fix, raise and maintain the prices of automotive constant-velocity-joint boots it sold to U.S. subsidiaries of GKN plc, a British automotive parts supplier. . . .”

“Today’s charge is the latest step in the Antitrust Division’s effort to hold automobile part suppliers accountable for their illegal and collusive conduct,” said Renata B. Hesse, Deputy Assistant Attorney General for the Department of Justice’s Antitrust Division. “The division continues to vigorously prosecute companies and individuals that seek to maximize their profits through illegal and anticompetitive means.”

“The department said the company and its co-conspirators carried out the conspiracies through meetings and conversations, discussed and agreed upon bids, price quotations and price adjustments, and agreed to allocate among the companies certain sales of the anti-vibration rubber and constant-velocity-joint boots parts sold to automobile and component manufacturers.”

“Including Toyo, 22 companies and 26 executives have been charged in the Justice Department’s ongoing investigation into the automotive parts industry. All 22 companies have either pleaded guilty or have agreed to plead guilty and have agreed to pay more than $1.8 billion in criminal fines. Of the 26 executives, 20 have been sentenced to serve time in U.S. prisons or have entered into plea agreements calling for significant prison sentences. . . .”

“The charges are the result of an ongoing federal antitrust investigation into price fixing, bid rigging and other anticompetitive conduct in the automotive parts industry, which is being conducted by each of the Antitrust Division’s criminal enforcement sections and the FBI.”

CHINA ANTITRUST CASES

On November 25, 2013, the Wall Street Journal reported that Qualcomm is subject to an antitrust investigation in China and Cisco is facing retaliation because of the actions of the US Congress against Huawei.  The investigation by the NDRC in China is regarding Qualcomm’s patent royalties on chips used for handsets.

Qualcomm’s chief executive acknowledged the investigation and indicated that the investigation is in response to U.S. restrictions on Chinese companies and revelations about surveillance by the National Security Agency.

Qualcomm, however, is the largest maker of processors and communications chips for mobile phone and has a dominant position in the high-speed technology called LTE that Chinese carriers are moving to adopt.

Qualcomm charges for patent royalties to mobile phone makers for use of its chips have resulted in South Korean and Japanese antitrust cases. Qualcomm is appealing adverse rulings in both countries.

In an interview with the Wall Street Journal, Qualcomm Chief Executive Paul Jacobs said the de facto U.S. ban on telecom gear maker Huawei Technologies and revelations about NSA spying were affecting Qualcomm’s business in China.  Executives of Cisco Systems also recently suggested that Chinese customers are cutting purchases of US tech gear because of the reaction to the US ban.

What goes around, comes around.

SECURITIES

COMPLAINTS

A number of new securities complaints cases have been filed against Chinese companies.

On October 29, 2013, Pang filed a class action securities case against NQ Mobile and various Chinese individuals. PANGNQ

On October 30, 2013 Hiller filed a class action securities action against NQ Mobile and various Chinese individuals. HILLER NQ

On November 5, 2013 Gangaramai filed a class action securities action against NQ Mobile and various Chinese individuals. GANGNQMOBILE

On November 14, 2013 Martin filed a class action securities action against NQ Mobile and various Chinese individuals. MARTINNQMOBILE

In talking with insurance brokers in China, it is now clear that the reason that the Chinese individuals are named in Class Action Securities cases is that insurance companies often insure the individuals that are in management or on the Board of Directors, but not the companies themselves

FOREIGN CORRUPT PRACTICES ACT

In November 2013, three Dorsey partners, Tom Gorman, who was formerly with the enforcement division of the US Securities and Exchange Commission, Nick Akerman, Nike Burkill and Aidan Colclough published the attached Anti-Corruption Digest regarding the Foreign Corrupt Practices Act and other UK Legal Actions against bribery. FCPA DIGEST

With regards to China the Dorsey partners state:

“FCPA Compliance in China “

“The US China Business Council (the “USCBC”) has published a report which provides an insight into practices which can assist companies doing business in the higher risk environment of the PRC. The report, entitled Best Practices for Managing Compliance in China, is based on a survey of 30 companies doing business in China, spanning a variety of industry sectors.”

“The survey highlights compliance practices currently being utilized by companies doing business in China. These include:

— Entertainment. One of the key risks faced by companies stems from commercial and government entertainment. 94% of the firms responding in the survey reported using mandatory monetary thresholds or limits on the amount that can be spent on entertainment and gift giving. 44% of those companies use global company wide limits in U.S. dollars while 56% keep the thresholds in local currency. The average threshold for entertainment expenses in China is about $72 per event.

–Gifts. Gift giving is a key issue because it is a customary practice in China. Most companies reported that they discourage gifts. When they are unavoidable, typically firms favor giving gifts of minimal monetary value with corporate logos such as flash drives, calendars, notebooks and small toys directly related to the business of the company. Most companies also maintain a threshold for gifts. The average amount for those in the survey was $57.

–Whistleblowers. Nearly all of the companies in the survey offer hotlines for staff to anonymously report compliance concerns. The most successful are those with multi-lingual support and local call-in numbers.

–Joint ventures. Given the local laws restricting the modes of foreign investment in China, these present one of the most challenging issues. Companies in the survey stated the importance of continually discussing compliance to ensure that it is considered a priority in the partnership. Given that a foreign partner may not always have direct input with regards to the joint venture’s day-to-day operations, the respondents noted that it is vital to ensure that senior leaders at the joint venture company continually reinforce the compliance message.”

If you have any questions about these cases or about the US trade, customs, false claims act, 337, patent, antitrust or securities law in general, please feel free to contact me.

Best regards,

Bill Perry

US CHINA TRADE WAR —DEVELOPMENTS IN TRADE, CUSTOMS, PATENTS, AND SECURITIES

Jinshang Park from Forbidden City Yellow Roofs Gugong Palace BeiDear Friends,

There have been some new developments in the trade, customs, patents, and securities areas.

TRADE

NEW ANTIDUMPING CASE AGAINST CHINA ON CONCRETE STEEL RAIL TIE WIRE

On Tuesday, April 23, a new antidumping case was filed against Concrete Steel Rail Tie Wire from China.  The alleged antidumping rate is 54%.  Attached is a copy of the relevant pages of the petition.  Steel Rail Tie Wire Petition-4-25-13  The ITC Preliminary Conference will be held on May 14, 2013.  See attached ITC notice. ITC PRELIM NOTICE

HARDWOOD PLYWOOD ANTIDUMPING PRELIM —  FAIRNESS COMMERCE STYLE

On April 30th, Commerce issued its preliminary antidumping duty determinaton and the hardwood plywood companies got nailed again.  The two mandatory companies received, in effect, 0% duty rates.  But one hundred and one Chinese exporters, the rest of China, which is supposed to get the average rate or at least a rate that reflects commercial reality, received 22%. Keep in mind that the US importers pay these antidumping duties, not the Chinese exporters.  See the attached fact sheet.  factsheet_China-Hardwood-Decorative-Plywood-Prelim-30APR13

GOVT AND PETITIONER’S COUNSEL AWARDED LEGAL FEES AND COSTS FROM CHINESE COMPANY IN TIANJIN MAGNESIUM CASE

Attached is an opinion of the Court of International Trade awarding the government and Petitioner’s counsel $42,344 in legal fees and costs from TMI for TMI’s obstructive behavior in trade proceedings.  TIANJIN MAGNESIUM SANCTIONS CASE

As the CIT stated in the attached opinion:

“TMI’s repeated efforts — through counsel — to obstruct Commerce’s exercise of its statutory duties, to delay proceedings through frivolous argumentation and filings, and to mislead the court on material matters of fact and law constitute an intolerable level of vexatiousness and bad faith.  . . . Given TMI’s persistent misconduct before this Court and before Commerce, an award of fees and costs related to its problematic filings in this case is warranted and necessary to deter additional costly distractions in future trade proceedings.”

CUSTOMS

HONEY RICO ACTION

On April 19, 2013, three US honey producers filed a class action lawsuit in the Federal Court in Illinois against Honey Holding Ltd. under RICO, the Racketeer Influenced and Corrupt Organizations Act alleging that Honey Holding had defrauded the US government and domestic honey makers by “landering” cheap altered versions of Chinese honey to disguise its country of origin and evade the Honey antidumping order.

Plaintiffs are asking for triple damages plus attorney fees.  The RICO Act or RICO is a United States federal law that provides for extended criminal penalties and a civil cause of action for acts performed as part of an ongoing criminal organization. The RICO Act focuses specifically on racketeering, and it allows the leaders of a syndicate to be tried for the crimes which they ordered others to do or assisted them in doing.

Attached is a copy of the complaint HONEY HOLDING COMPLAINT, which alleges that:

“Plaintiffs, on behalf of themselves and Class Members, bring this action as a national class action under Title XI (“RICO”) of Public Law 91-452, 84 Stat. 922 (1970) (as codified at 18 U.S.C. §§ 1961–1968, as amended) and the common law against Defendants for their fraud, negligent misrepresentation, conspiracy, and clandestine and wrongful importation and dumping of Chinese honey (and possibly honey from other unlawful source countries) on the United States honey market without paying the corresponding antidumping duties, by reason of which, Defendants substantially depressed the price of honey legitimately produced, packed, marketed, and sold in the United States by Plaintiffs and Class Members, damaged the Government in its governmental functions, and damaged Plaintiffs and Class Members in their businesses and/or property.  . . .”

“At all relevant times, since as early as 2000, Defendants have participated in a worldwide conspiracy to deceive Government import authorities about the origin of honey produced in China, avoid paying the corresponding antidumping duties on the Chinese honey, defraud the United States honey market and substantially injure Plaintiffs and Class Members—legitimate domestic honey producers and packers—in their businesses and property. “

PATENTS

ZTE AND LENOVO

Attached are patent complaints filed by Wyncomm on April 13, 2013 against ZTE and Lenovo.  ZTE PATENT LENOVO

HUAWEI AND ZTE—POTTER VOICE    

Attached is a patent complaint filed on April 25, 2013 against ZTE and Huawei by Potter Voice Technologies.  ZTE POTTER VOICE

CHINESE SEMICONDUCTOR COMPANIES

Attached is a patent complaint filed on April 18, 2013 by Semcon Tech LLC against Semiconductor Manufacturing International Corporation, Semiconductor International Shanghai, Semiconductor Manufacturing International , Beijing and Tianjin, and Shenzhen and Siltech Semiconductor Shanghai  SHORT SEMICONDUCTOR PATENT

SECURITIES

US SECURITIES CASE BETWEEN TWO CHINESE COMPANIES IN US FEDERAL COURT

Attached is a securities complaint filed on April 17, 2013 in US Federal Court in California by one Chinese company suing another Chinese company for securities fraud under US Securities law.  The case is Great Dynasty International Financial Holdings Ltd. v. Haiting Li, Zhiyan Li, and Pacific Bepure Industry, Inc.  INTER CHINA SECURITIES CASE

If you have any questions about these cases or about the US trade, customs, patent, antitrust or securities law in general, please feel free to contact me.

Best regards,

Bill Perry

US CHINA TRADE WAR — GUILTY VERDICT VITAMIN C ANTITRUST CASE

New York City Skyline East River Chrysler Building NightDear Friends,

There have been a number of developments in the trade, antitrust, patent, products liability and securities areas.  Most important being a Guilty Verdict in the Vitamin C case in New York City with certain Chinese Producers now facing $162 million in liability.

TRADE

HARDWOOD PLYWOOD

Commerce has issued a revised CVD preliminary determination in the Hardwood Plywood case, but the CVD rates did not change much ranging from 0 to 27%.  See attached documents.  AMENDED PRELIM HARDWOOD PLYWOOD CVD AMENDED PRELIM PLYWOOD DECISON MEMO

ANOTHER GPX TYPE CASE THROWN OUT

On March 12, 2013, the Court of International Trade issued another GPX type of decision in the attached Guangdong Wireking Case dismissing the argument that bringing a countervailing duty case against China is unconstitutional.  GUANGDONG WIREKING CASE

ANTITRUST—VITAMIN C CASE—GUILTY VERDICT

As a follow-up to my last two posts on this blog with day to day descriptions of the Vitamin C antitrust jury trial, yesterday, Thursday, March 14, 2013,  the Jury issued a guilty verdict and certain Chinese companies are now facing $162 million in liability.

As stated in the prior two posts, the Jury trial started on Monday, February 25, with allegations that the price fixing by Chinese Vitamin C companies cost US businesses $54.1 million. The specific allegation is that China’s largest vitamin C makers voluntarily entered into a series of agreements that limited supply and artificially inflated prices U.S. purchasers paid for Vitamin C between 2002 and March 2006.  About 80 percent of vitamin C used in the U.S. is produced in China.  The remedy in an antitrust case is triple damages or $54 million times 3 or $162 million.

The trial is historic because Chinese companies have never before been forced to defend themselves in an antitrust case in US court.

The Chinese Vitamin C companies’ defense is that the Chinese government compelled the companies to set the prices, which is known as the sovereign compulsion defense, through the China Chamber of Commerce for Import & Export of Medicine & Health Products (“Chamber”).  To win on this argument, however, the Chinese companies had to prove that the Chinese government actually compelled the Chinese companies to set the price floor for the Vitamin C exports on pain of penalty.

On Monday, March 11th, and Tuesday, March 12th, the trial continued and the economists made competing presentations regarding damages.  The Plaintiffs’ expert Dr. Bernheim stated that the Wu report from the Chinese side attributing sharp price increases to fears over SARS and avian flu outbreak- as opposed to industry collusion was “nonsensical” and riddled with mathematical errors.

On Wednesday, there were closing arguments.  Just before the case went to the Jury, the Judge stated that China Pharmaceutical Group Ltd. and its vitamin C production unit had bowed out of an antitrust trial probably because of a confidential settlement agreement with the Plaintiffs.

China Pharmaceutical’s exit means that only North China Pharmaceutical Group Corp. and its HeBei Welcome Pharmaceutical Co. Ltd. subsidiary remained in the case to face the Jury.

The Plaintiffs’ lawyer stated that the US companies were still requesting $54.1 million in damages for setting prices for Vitamin C, which harmed American business.

NCPG and HeBei Welcome’s attorney told the Jury that Plaintiffs’ attorney in showing jurors numerous documents regarding the Chinese companies price fixing, presented evidence at trial in a misleading manner.

Both attorneys focused on the testimony of Qiao Haili, formerly the Chamber’s top vitamin C regulator.  Haili, who testified for the Chinese companies, said that he ordered Chinese companies to coordinate pricing activity through an industry chamber group he directed.  Haiti testified that he had the power to punish companies, including voiding their export contracts, if they didn’t comply with pricing arrangements.

But Plaintiffs’ attorney during cross-examination presented Haili with a memo he sent to MOFCOM in July 2003, stating the group the agency had formed to regulate competition vitamin C manufacturers lacked legal authority to penalize companies that didn’t follow industry rules. Haili wrote that industry rules were a mere formality and lacked enforcement mechanisms.

“(Haili) wrote a memo about his lack of authority,” Plaintiffs’ attorney said. “He wrote a memo that everything he testified under oath was wrong.“   Plaintiff’s attorney also challenged Haili’s credibility as a witness, pointing out that he gave differing statements in deposition and then at trial.  Plaintiffs’ attorney also suggested that Haili wasn’t actually a member of the Chinese government or working as a MOFCOM surrogate.

NCPG and HeBei Welcome’s attorney responded that Haili’s memo was referring to a lack of regulation in China’s penicillin industry and didn’t relate to vitamin C.

After closing arguments, the case went to the jury for a decision.

On Thursday, March 14, 2013, less than one day after the case was sent to the jury, the Jury returned a guilty verdict of $54 million, which was tripled to $162.3 million against North China Pharmaceutical Group Corp. and its vitamin C manufacturing unit for price fixing.  The Jury rejected Defendants’ argument that the Chinese government has forced them to fix prices and limit supply to a class of U.S. businesses.  The jury found that NCPG and its HeBei Welcome Pharmaceutical Co. Ltd. met with competitors to coordinate pricing in China’s vitamin C industry.  U.S. District Judge Brian Cogan said he would sign an order trebling the damages later Thursday, which would push the companies’ liability to $162.3 million.

Plaintiffs’ attorney from Boies Schiller stated “The jury found that this was never about the Chinese government,” “This was about the cartel in China violating our laws.”

Jurors deliberated less than a day before reaching the verdict.

PATENTS

And another patent case was filed against Huawei.  Attached is the complaint filed on March 12, 2013 by Packet.  SHORT PACKET HUAWEI COMPLAINT 3122013

PRODUCTS LIABILITY

Attached is a products liability complaint filed on March 11, 2013 against Foshan Mattress.  FOSHAN MATTRESS

SECURITIES

SUNPOWER PAYS $20 MILLION TO SETTLE SECURITIES CLASS ACTION FRAUD CASE

On March 14, a California federal judge preliminarily approved a $19.7 million settlement in a class action securities case between SunPower Corp. and a class of shareholders who claim the solar-power company falsely inflated earnings reports, leading stock values to fall substantially.  U.S. District Court Judge Richard Seeborg allowed a retirement fund and an investment management fund to become the lead plaintiffs for the shareholder class, representing thousands of shareholders who bought SunPower shares between 2008 to 2009.

SunPower was hit with the putative class-action in November 2009, shortly after revealing the alleged fiscal misconduct.  Plaintiffs accused SunPower of falsifying seven consecutive quarters of financial results and overstating the company’s earnings and making misleading statements about the company’s fiscal health.

According to the settlement motion, those alleged misstatements allowed SunPower to raise $450 million in stock and bond offerings “using fictitious financial reports during a period of intense competition from lower-cost competitors in China.”

If you have any questions about these cases or legal areas, please feel free to contact me.  As mentioned before, I will be in China in Beijing and Shanghai from March 17 to 30th.  If anyone wants to meet and talk about these developments, please feel free to contact me.

Best regards,

Bill Perry

US CHINA TRADE WAR–SINKS, WOOD FLOORING, SOLAR CELLS, ANTITRUST, PATENT, AND SECURITIES

White House Fountain Flag After Snow Pennsylvania Ave WashingtonDear Friends,

There have been a number of developments in the trade, antitrust, patent, securities and corporate areas.

TRADE

STEEL SINKS

The Commerce Department issued its final attached antidumping and countervailing duty determinations Wednesday, February 20th, in the Steel Sinks case. The CVD rates ranged from 4.8 to 12.26% and the average CVD rate is 8.5%. C-570-984 Sinks from the PRC Final FR Notice   A-570-983 Drawn Sinks AD FR_signed   factsheet-prc-sinks-adcvd-final-20130220

In the antidumping case, the rates ranged from 27 to 39% with the Chinese separate rate companies getting 33%. All other Chinese companies received a rate of 76%.

On Thursday, February 21st, I appeared at the ITC hearing along with three importers to fight the case in the ITC injury investigation. All the Chinese companies have given up at the ITC and many have not even submitted responses to the ITC questionnaire.

I firmly believe that the decision of Chinese companies to give up at the ITC is a big mistake. Despite the fact that my three importers appeared as the only respondents at the Steel Sinks case and despite the advice from many trade attorneys in China and the US that this case is over, the ITC asked the three importers and myself questions for 2 and a half hours. If the case is a slam dunk win for the Petitioners with no reason to fight the case, why would Commissioners bother to ask the importers questions for 2 and a half hours?

The problem with the advice that the ITC injury investigation is a worthless exercise is the Chinese companies and US importers have only one place where they can completely win the case and that is at the ITC for no injury. When Chinese companies and importers give up on the ITC injury investigation, it becomes a self-fulfilling prophecy, and because it does not have the evidence, the ITC goes affirmative.

By the way, for those who say it is impossible to win the injury case at the ITC, then why did the US industry lose the injury case about a year ago in the Steel Wire and Steel Wheels from China antidumping cases?

HARDWOOD PLYWOOD

On February 27, 2012, the Commerce Department issued its attached preliminary countervailing duty determination in the Hardwood Plywood Case and nailed a lot of Chinese companies.  factsheet-prc-hdplywood-cvd-prelim-20130227  The mandatory rates range from 0% for some Chinese companies to 27.16% for a number of companies as adverse facts available because they refused to cooperate in the case. All other Chinese companies received 22%, an average of the 0 and the 27.16%.

Thus, if one Chinese company that is chosen as a mandatory company refuses to cooperate with the Commerce Department’s investigation, all the rest of the Chinese companies exporting are nailed if the other Chinese company that cooperates gets 0.  Welcome to fairness Commerce style.

If the Chinese company had not received a 0, but 2% or more, the Chinese separate rate companies would have received that 2% or more.

We can expect an antidumping preliminary determination in the Hardwood Plywood case about 60 days from now.

WOOD FLOORING REVIEW INVESTIGATION

On Monday, I gave a presentation to the US importers on the Wood Flooring review investigation.  Chinese companies that want to receive a low antidumping rate have to file either a certification or an application by the end of March, March 31, 2013, at the Commerce Department.

Attached is a Powerpoint on Commerce Department review investigations. REVIEW INVESTIGATIONS In the Powerpoint I describe review investigations and when a Chinese company should file a separate rate certification as opposed to a separate rate application.

MARCH REVIEW INVESTIGATIONS

Attached is the Federal Register notice giving Chinese companies the right to request an antidumping and countervailing duty review investigation for these products:

Antidumping Duty Proceedings
The People’s Republic of China:
Chloropicrin, A-570-002…………………….. 3/1/12-2/28/13
Circular Welded Austenitic Stainless Pressure 3/1/12-2/28/13
Pipe, A-570-930……………………………
Drill Pipe, A-570-965………………………. 3/1/12-2/28/13
Glycine, A-570-836…………………………. 3/1/12-2/28/13
Sodium Hexametaphosphate, A-570-908………….. 3/1/12-2/28/13
Tissue Paper Products, A-570-894…………….. 3/1/12-2/28/13

Countervailing Duty Proceedings

The People’s Republic of China:
Circular Welded Austenitic Stainless Pressure 1/1/12-12/31/12
Pipe, C-570-931……………………………
Drill Pipe, C-570-966………………………. 1/1/12-12/31/12

MARCH REVIEWS

SOLAR CELLS—THIRD COUNTRY CELLS

Customs is cracking down on US importers with regard to the documents needed to prove that panels and modules from China contain solar cells from third countries.

Commerce told Customs in their instructions:

“Importers of panels/models from ANY country that does not contain subject solar cells produced in the PRC must maintain the Importers Certification in the Department of Commerce (DOC) AD/CVD Order 2153302 dated 06/01/2012 section 3(A). In addition to the Importer Certification, the importer must maintain documentation supporting the certification.”

“If an exporter of panels/models not containing subject solar cells produced in the PRC is located in the PRC, BOTH the importer and the exporter must maintain the Exporter Certification in DOC AD/CVD order 2153302 dated 06/01/2012 section 3(B). In addition to the Exporter Certification, the importer and exporter must maintain documentation supporting the certification.”

In a recent notice of action issued to a US importer, Customs stated the following:

“We note the lack of any documents between the supposed maker of the solar cells and the Chinese manufacturer. All documents lack any traceable and/or verifiable references such as lot numbers, serial numbers, and/or production records. We find the Purchase Order, Invoice, and the Bill of Materials (BOM) to be inadequate support for the certification of third-country made solar cells.”

Customs is going to be very tough in this area so importers have to watch this situation very closely.

PRESIDENT OBAMA’S TRADE AGENDA FOR 2013

On March 1st, USTR released President Obama’s Trade Agenda for 2013, which is attached.  OBAMA TRADE AGENDA USTR PRESS RELEASE  With regards to China, the Agenda states at pages 15-16:

“China

As the complex trade and economic relationship between the United States and China continues to mature and evolve, President Obama is committed to ensuring U.S. trade with China provides American exporters with a level playing field to compete in China’s large and growing market. The United States has welcomed China’s growing leadership role at both the regional and multilateral levels; moving forward, we will seek to enhance cooperation toward common objectives on the basis of our shared responsibility to sustain global economic growth and stability in support of trade-related jobs.”

“In 2013, the United States will address trade objectives with China using all available tools including dialogue, negotiation, and enforcement when appropriate. We will seek to increase transparency and eliminate market access barriers across all sectors. We will advance BIT negotiations with China to secure improved market access, important investor protections, and increased certainty for US investors. We will continue to work to obtain a comprehensive offer from China, commensurate with other Parties’ coverage, to join the WTO Government Procurement Agreement, as this would provide substantial access for U.S. and international exporters to one of the world’s largest government procurement markets. We will closely monitor implementation of China’s bilateral and WTO commitments to respect and protect U.S. intellectual property, and will work with China to improve intellectual property protection and enforcement, recognizing that strong rule of law is essential to encourage and support continued innovation. As stated, we will also continue to hold China accountable for its other WTO commitments through appropriate enforcement efforts that aim to end discriminatory policies wherever they are discovered in China.”

“Our 2013 efforts to promote healthy and equitable trade with China will build on recent progress in several areas. Bilateral engagement in 2012 – through the Joint Commission on Commerce and Trade and the Strategic and Economic Dialogue, as well as the Innovation Dialogue and other key working groups and bilateral fora – produced meaningful results on key trade and investment issues, though there is more work to do. In 2013, we will continue to work proactively through bilateral venues to address new and ongoing challenges, as well as seeking timely and thorough implementation of China’s past commitments, including but not limited to: addressing U.S. concerns regarding various measures impeding imports of U.S. goods, such as food and agricultural products, information technology and telecommunications equipment, medical devices, and an array of manufactured products into China; and not discriminating in favor of China’s state-owned enterprises and national champions in providing credit, taxation incentives, and in regulatory policies.”

“To preserve and support American jobs and innovation, the United States will rigorously monitor China’s 2012 commitment to treat intellectual property rights owned or developed in other countries the same as intellectual property rights owned or developed by the Chinese, along with China’s commitments not to interfere with businesses’ technology transfer decisions, and to promptly correct any measures inconsistent with this commitment. In addition, we will seek prompt implementation of China’s 2012 commitments on intellectual property, including the commitments regarding the use of legal software by Chinese enterprises, as well as audits of software on computers used by the Chinese government. We will also closely monitor implementation of China’s February 2012 agreement, which followed the United States’ win in a WTO dispute, to increase market access significantly for U.S. movies being imported and shown in China’s theaters.”

ANTITRUST—VITAMIN C CASE

The Vitamin C antitrust jury trial has started and there are a lot of fireworks.

The Jury trial started on Monday, February 25, with allegations that the price fixing cost US businesses  $54.1 million. The allegation is that China’s largest vitamin C makers voluntarily entered into a series of agreements that limited supply and artificially inflated prices U.S. purchasers paid for Vitamin C between 2002 and March 2006. About 80 percent of vitamin C used in the U.S. is produced in China.

The trial is historic because Chinese companies have never before been forced to defend themselves in US court. A key question jurors are being asked to consider is whether Chinese businesses conspired to set prices in response to market forces driving down the product’s cost, or if the Chinese government, as the companies contend, compelled them to enter into the agreements as part of its regulation of the industry.

Chinese manufacturers began discussing ways to protect vitamin-C prices and limit exports after the cost for the product plummeted to $3 per kilogram by the end of 2001. The companies entered into written pricing agreements during meetings of a vitamin-C subgroup of the government-controlled China Chamber of Commerce for Import & Export of Medicine & Health Products.

The Chinese companies received help from the Chamber in coordinating their pact, but each of the manufacturers voluntarily agreed to enter into the price-fixing agreement. Membership in the Chamber is voluntary, and each of the companies is allowed to set the organization’s rules and elect its officers. Jurors will be shown numerous internal documents demonstrating that the companies acted independently of the Chinese government

Attorneys representing CPG, Weisheng, Hebei Welcome and NCPG described the organization in stark terms, saying the Chamber operated under the government’s thumb and stressed to the jury that it’s not comparable to the U.S. Chamber of Commerce or similar trade groups. China considered vitamin C one of its key exports and controlled the industry.

On Tuesday, testimony started at the trial in the Eastern District of New York. Jurors were shown an internal memo from an alleged co-conspirator urging employees to “be smart” and conceal their actions.

On day two of the trial in Brooklyn federal court, the jury was told that China-based Aland (Jiangsu) Nutraceutical Co. Ltd. — which avoided trial by settling last year for $10.5 million — sought to conceal its involvement in the price-fixing ring after it was named in the suit along with other defendants.

“We need to do things in a more hidden and smart way,” the memo said in part; it was written after the lawsuit was filed in January 2005 by a superior of Wang Qi, Aland’s former head of vitamin C marketing and sales.

Qi took notes of numerous meetings between executives of other Chinese companies, including defendants Weisheng Pharmaceutical Co. Ltd. and Hebei Welcome Pharmaceutical Co. Ltd., where they determined what prices they would quote U.S. businesses, according to documents shown Tuesday during his testimony. The notes described meetings from 2001 through 2005 convened by the China Chamber of Commerce for Import & Export of Medicine & Health Products.

In one email from April 2004, Qi revealed to a customer based in India that members of Commerce’s vitamin C group had agreed to stop production of the nutrient in the coming months — a move that was intended to stabilize prices. Qi said the information was used to build trust with the customer and entice them to purchase more vitamin C.

Under questioning by plaintiffs’ attorney Bill Isaacson of Boies Schiller & Flexner LLP, Qi denied that Aland attempted to mask its dealings with other Chinese vitamin C producers after the lawsuit was filed, saying through a translator that despite what the memo said the company continued to follow its normal procedures. That included submitting monthly reports on China’s vitamin C market, he said.

Qi was asked throughout the day whether he recalled anything from the meetings but said repeatedly he couldn’t remember details about them that weren’t included in the notes he took, noting that some of the meetings took place more than a decade ago.

The notes showed that price controls China’s vitamin C producers agreed on came in response to changes in the market. One meeting was convened on Dec. 26, 2003, in Beijing after purchasing activity for vitamin C slowed down in the weeks leading up to Christmas, which sent the price for the nutrient tumbling. At the meeting, companies pushed for the establishment of a $9 per kilo ceiling floor.

Qi said he threw away the laptop he used to record what happened at the meetings in 2005 — shortly after the lawsuit was filed. He denied that he disposed of the laptop in response to the litigation, and said through a translator that it went “kaput.” Aland at the time didn’t have rules about preserving documents, he said.

On Wednesday, witnesses told a New York federal jury that Chinese trade regulators could impose penalties against vitamin C manufacturers, including blocking them from selling to foreign customers, if they refused to participate in an industry group that allegedly forced them to fix prices and limit supply
.
Two executives of Aland (Jiangsu) Nutraceutical Co. Ltd., which avoided trial by settling last year for $10.5 million, described how China’s Ministry of Commerce, known as MOFCOM, exerted its influence over the industry through a commerce chamber. The four companies on trial claim they can’t be held liable for violating U.S. antitrust laws because the Chinese government compelled them to collude through the group.

On his second day on the witness stand, Aland’s former head of vitamin C sales Wang Qi said the chamber had the authority to impose sanctions on companies that didn’t participate in meetings where competitors discussed pricing, quotas and market conditions.

When an attorney for the defense asked whether Aland was aware the chamber could restrict it’s vitamin C exports, Qi said through a translator “we were very clear about that.”

Qi’s testimony was consistent with statements made by former Aland General Manager Kong Tai, who said China wouldn’t allow manufacturers to export vitamin C if they withdrew from the chamber. Vitamin C export contracts require a seal from the China Chamber of Commerce for Import & Export of Medicine & Health
Products, Tai said.

Tai’s statements were made during a deposition in 2008 that was shown on video to the jury. While vitamin C producers could discuss their views on what the appropriate price for the nutrient should be, ultimate approval of the controls came from the head of the commerce group, he said.

Throughout Qi’s testimony, an attorney for vitamin C purchasers pointed out that internal documents chronicling group meetings held before the suit was filed did not mention MOFCOM or any alleged pressure placed on the companies by the Chinese government.

U.S. purchasers contend the manufacturers acted independent of the Chinese government when it agreed on pricing and other product controls.

On Wednesday, a former executive who worked for both NCPG and Hebei was questioned about how the two companies are connected. Their relation is important because U.S. purchasers claim NCPG, which does not manufacture vitamin C on its own, was involved in the price-fixing conspiracy.

Huang Pinqi, former NCPG general manager and Hebei chairman, was elusive when asked by the plaintiffs’ counsel to describe the companies’ corporate relationship.

PATENTS

Another patent case was filed against Huawei.  Attached is the complaint.  HUAWEI PATENT CASE

SECURITIES AND CORPORATE LAW

PUDA COAL

As a follow up to the article, I sent out last week about the decision by the Delaware Court in In Re Puda Coal, Inc. Stockholders Litigation, C.A. No. 6476-CS (Del. Ch. Feb. 6, 2013), Peter Corne and Robin Weir in Dorsey’s Shanghai office have written an article about the decision. See below:

Delaware Court Ruling: A Cautionary Tale for Independent Directors March 1, 2013

“Independent directors of companies with substantial assets outside the U.S. should carefully consider whether they have the genuine ability to discharge their duties, given a recent ruling from the Delaware Chancery Court.
On February 6, Chancellor Leo Strine, Jr., of the Delaware Court of Chancery refused to dismiss a claim for breach of fiduciary duty against independent directors of Puda Coal Inc., a Delaware corporation whose primary assets and operations are in China. Plaintiffs alleged that the independent directors had failed to detect the unauthorized sale of the company’s assets by its chairman. “

“In In Re Puda Coal, Inc. Stockholders Litigation, C.A. No. 6476-CS (Del. Ch. Feb. 6, 2013) (Bench Ruling), Chancellor Strine bluntly reminded independent directors that they must be capable of fulfilling their fiduciary duty of oversight, no matter where the company’s assets or operations are located. Among his many forthright comments”:

“[I]f you’re going to have a company domiciled for purposes of its relations  with its investors in Delaware and the assets and operations of that company
are situated in China … in order for you to meet your obligation of good  faith, you better have your physical body in China an awful lot. You better
have in place a system of controls to make sure that you know that you  actually own the assets. You better have the language skills to navigate the
environment in which the company is operating. You better have retained  accountants and lawyers who are fit to the task of maintaining a system of
controls over a public company.”

“Independent directors who step into these situations involving essentially  the fiduciary oversight of assets in other parts of the world have a duty not
to be dummy directors … [I]f the assets are in Russia, if they’re in Nigeria,  if they’re in the Middle East, if they’re in China, that you’re not going to
be able to sit in your home in the U.S. and do a conference call four times a  year and discharge your duty of loyalty. That won’t cut it.”

“There’s no such thing as being a dummy director in Delaware, a shill, someone  who just puts themselves up and represents to the investing public that
they’re a monitor.”

Strine stressed that the only reason to have independent directors is because of their independence and their ability to monitor the company’s management. He commented that if the flow of information was in a language that the director doesn’t understand, in a culture where the legal and ethical standards may be different from in the U.S., this could be “very difficult… You better be careful there. You have a duty to think. You can’t just go on this [board] and act like this was an S&L regulated by the federal government in Iowa and you live in Iowa”.

Strine also had a message for independent directors who, like the independent directors of Puda Coal, thought they could avoid responsibility by resigning. He suggested that the act of resignation itself could be a breach of fiduciary duty. “And that’s another reason for sustaining the complaint.”

NEW SEC SECURITIES CASE AGAINST CHINESE COMPANY FOR FRAUD

The SEC has filed a new securities fraud case against a Chinese company, Keyuan Pharmaceuticals.  See the attached complaint.  KEYUAN PHARMACEUTICALS  Like many of the Securities fraud cases against Chinese companies, this case involves a reverse merger through a US shell company.

If you have any questions about these cases or legal areas, please feel free to contact me.

Best regards,

Bill Perry

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